VAT is a tricky tax that can confuse business owners. It works by businesses adding it to their prices and then accounting for it with HMRC. This isn't always a straightforward concept, so we're breaking it down into the clearest possible process.

A business must register for VAT if its VAT-taxable turnover is over a certain threshold. As of 1st April 2024, this threshold was increased to £90,000, and it is set to remain at this level for the 2025/26 tax year. Some businesses also choose to register voluntarily, as there are certain advantages to doing so that we'll explore further down.

As a business owner, you are responsible for knowing when you need to register for VAT. Failing to do so on time can lead to penalties, which will take a chunk out of your revenue – so it's vital to understand how registration works.

Before you register, let's ensure you understand what VAT is and what it's for.

Understanding VAT: a quick introduction 

VAT – or Value Added Tax – is a tax on most goods and services in the UK. When you buy a product that is subject to VAT in a shop, for example, the tax is already included in the price you pay.

Three rates of VAT apply to goods and services in the UK:

• Standard Rate (currently 20%) - applies to most goods and services.
• Reduced Rate (currently 5%) - applies to specific items such as children's car seats and home energy.
• Zero Rate (0%) - applies to most food, books, and children's clothing.
• Items may also be exempt (or 'outside the scope') of VAT, such as postage stamps or financial services.

The rules can also change. For example, from 1st January 2025, private school fees will become subject to the standard 20% VAT rate.

VAT isn't just about adding a charge. It also allows VAT-registered businesses to reclaim the VAT they pay on their own business purchases. This is based on the difference between the VAT you have charged your customers (output tax) and the VAT you have paid to your suppliers (input tax).

If your business meets the VAT threshold, you must register so you can charge the appropriate VAT rate. This can feel intimidating since it generally means adding a 20% charge to your prices, but it is a legal requirement.

When must I register for VAT?

Legally, you must register for VAT when:

• Your VAT-taxable turnover (the total of all sales that aren't exempt from VAT) exceeds the current threshold of £90,000 within any rolling 12-month period.
• You expect your VAT-taxable turnover to exceed the £90,000 threshold in a single 30-day period.
• Your business is based outside the UK, but you supply goods or services to the UK (or expect to in the next 30 days).

If you go over the threshold in a rolling 12-month period, you must register within 30 days of the end of the month you crossed it. Your effective date is the first day of the second month after you went over. If you expect to go over in the next 30 days, register by the end of that 30-day period - your effective date is the date you realised.

If you fail to notify HMRC in time, you may have to pay a penalty. Under the current regime, penalties for late VAT payments will apply. A 3% penalty is charged on tax 15 days overdue, rising to a total of 6% after 30 days, with a further 10% per annum penalty accruing daily after that.

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Exploring the benefits and drawbacks of VAT registration

VAT registration might sound like a scary idea, but the scheme has advantages for your business too. The impact of registration depends on your specific circumstances. Here are the main benefits and drawbacks:

Benefits

• Standard rate VAT-registered businesses can reclaim the VAT they spend on goods and services from other VAT-registered businesses. This can significantly improve your cash flow.
• While you must charge VAT on your sales, this is standard practice for other VAT-registered businesses, who can simply reclaim it. It's common in business-to-business (B2B) transactions to see prices quoted excluding VAT.
• Being VAT-registered can make a small business appear more established and credible. Displaying your VAT number on invoices and letterheads can be a sign of scale, and some larger companies prefer to only work with other VAT-registered businesses.

Drawbacks

• Any of your customers who are not VAT-registered (such as the general public) must bear the full cost of the added VAT, which could make your prices less competitive.
• If you charge more VAT than you pay on your purchases, you must pay the difference to HMRC, which can be a significant quarterly or annual bill.
• You must keep detailed digital records and file regular VAT returns in a way that is compliant with Making Tax Digital (MTD) rules, which can be an administrative burden.

Preparing for VAT registration: what do you need to know?

Now that you understand what VAT is and how it affects businesses, you need to know how registration works. Here's everything you need to know before you go ahead and register.

Who can register for VAT?

There's a common misconception that only a Limited company can register for VAT. In fact, VAT registration is open to businesses of all types, including Sole Traders and Partnerships.

You can register for VAT voluntarily at any time. Once your business turnover reaches the VAT threshold, registration is mandatory.

Can I register for VAT without an accountant?

Yes - you don't need an accountant to register for VAT. However, being VAT-registered brings significant bookkeeping and administrative responsibilities. You'll need to keep digital records of all VAT sales and purchases and regularly complete your VAT return using MTD-compatible software.

We'd advise working with an accountant for your VAT responsibilities. The time saved can quickly repay the cost, and a reliable accountant can help you avoid the pitfalls that lead to penalties.

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What do I need to register?

To register for VAT online, you will need a certain set of information depending on your business type.

Limited companies need to provide the following:

• Your company's legal name and registration number (from Companies House)
• Your business contact and bank details
• Your Unique Taxpayer Reference (UTR) for Corporation Tax
• Details of your turnover and the nature of your business activities
• Information on other taxes, such as PAYE and Self Assessment, may also be required.

Sole Traders and Partnerships must provide:

• Your name, date of birth, and National Insurance number
• ID such as a passport or driving licence
• Your business contact and bank details
• Details of your turnover and the nature of your business
• Your Self Assessment Unique Taxpayer Reference (UTR), if you have one.

Step-by-step guide on how to register for VAT

While the concept of VAT can be complicated, the registration process itself is straightforward. HMRC now requires almost all businesses to register for VAT online.

How to register for VAT online

1. Prepare for your registration by gathering the documents and information we've discussed above.
2. Go to the HMRC website to register for VAT. You will need to sign in using your Government Gateway ID. If you don't have one, you can create one.
3. Once logged in, navigate to the heading "Get another tax, duty or scheme" and select VAT from the options.
4. Follow the steps in the portal, filling in your business details as prompted.
5. Once you complete and submit your registration, your Government Gateway account will become your VAT online account. HMRC typically processes applications within 10 working days.
6. You will receive a VAT certificate in the post within 30 days. This certificate contains your unique VAT number and tells you when to submit your first VAT return and make your first payment.

Registering by post (by exception only)

HMRC has made online registration mandatory for most businesses. A paper VAT1 form is only available in specific circumstances, for example, if you are applying for an exemption from registration or if your business structure makes online registration impossible.

To request a paper form, you must call the VAT: general enquiries helpline. HMRC will ask why you cannot register online before sending you a form.

In some cases, you may need to submit additional forms alongside your VAT1, such as for joining the Agricultural Flat Rate Scheme (VAT98).

Choosing your VAT accounting scheme: overview

When you register for VAT, you can choose to join a VAT scheme. Each scheme offers a different way to calculate and pay your VAT. We'd always recommend asking an accountant for advice, as the best scheme for you depends on your circumstances.

Annual Accounting Scheme

With annual accounting, you only submit one VAT return each year. However, you still have to make regular advance payments towards your VAT bill throughout the year, based on an estimate of your liability.

VAT Flat Rate Scheme

The Flat Rate Scheme simplifies VAT calculations. You pay a fixed percentage of your total turnover to HMRC, rather than calculating the difference between the VAT you charge and the VAT you pay. The percentage varies depending on your industry. This can be beneficial for businesses with low costs.

VAT Cash Accounting Scheme

Cash accounting allows you to account for VAT based on when you are paid, rather than when you issue an invoice. This can be a great way to protect your cash flow, as you don't have to pay VAT to HMRC on money you haven't yet received from a customer.

What happens after you register for VAT?

Once you've registered, you should receive a VAT certificate containing your VAT number within 30 working days. If you haven't heard anything from HMRC within this timescale, it's worth contacting them to check on your application's progress.

The VAT certificate also tells you when you need to submit your first VAT return, which you must do via your online VAT account using MTD-compatible software.

Remember that your liability to account for VAT starts from your 'effective date of registration' (the date you crossed the threshold), not the date you completed your registration.

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Keeping digital records for VAT

Managing your VAT obligations is all about good record-keeping. Under Making Tax Digital (MTD) rules, all VAT-registered businesses must keep digital records and use compatible software to submit their returns. We'd recommend using a digital accounting tool to keep track of all your invoices and payments.

Ready to get started?

If you need to register for VAT, or you want to make your company's VAT duties as simple as possible, consider choosing Crunch. Our free accountancy software can be upgraded with our VAT add-on for just £3.50 +VAT per month. It simplifies your returns, automates calculations, and ensures you are fully compliant with Making Tax Digital.

FAQs on VAT Registration

Can anyone register for VAT?

Anyone in the UK that does business as a sole trader, partnership or limited company can register for VAT. 

How much does it cost to become VAT registered? 

Registering for VAT with HMRC is completely free.

Can I register for VAT with no turnover?

Yes. Any business can register for VAT voluntarily, even if its turnover is below the £90,000 threshold.