“We’re nowhere near the VAT threshold.”
I hear this quite often. Sometimes it is true. Sometimes the business owner simply has not checked the right way — and the difference can be expensive.
The threshold is not measured how most people assume
The £90,000 VAT registration threshold is not measured against your accounting year. It is not measured against the tax year either.
It is based on your taxable turnover over any rolling 12-month period.
That means the test is run afresh at the end of every month, looking back over the previous twelve. A business can have a quiet start to the year and then a few strong months that push the rolling total over the threshold, without anything looking unusual in the annual figures.
The second test people miss
There is also a forward-looking test.
If you expect your taxable turnover to exceed £90,000 in the next 30 days alone, you may need to register — even if your previous 12 months were comfortably below the threshold.
This catches businesses that win a single large contract. The historic figures are irrelevant; what matters is what you now expect to happen.
What happens when you cross it
If you go over the threshold based on the previous 12 months, you generally have 30 days from the end of that month to notify HMRC. Your registration then takes effect from the first day of the second month after you exceeded it.
Rolling turnover exceeds £90,000 during September
Notify HMRC by 31 October
Registration effective from 1 November
Why late registration is costly
This is the part that hurts.
If you register late, you may have to pay VAT on sales from the date you should have been registered — even if you did not actually charge VAT to your customers at the time. A late-registration penalty can also apply.
In practice that often means paying VAT out of money you have already received and treated as income. Going back to customers months later to ask for an extra 20% is rarely a conversation that ends well, and with consumer customers it is usually not possible at all.
It is not only about the tax
Crossing the threshold changes the economics of the business, and it is worth thinking about before it happens rather than after.
If your customers are VAT-registered businesses, they reclaim the VAT and little changes for them. If your customers are consumers or non-registered businesses, you either absorb the VAT and lose margin, or pass it on and become 20% more expensive overnight.
On the other side, registration lets you reclaim VAT on purchases, and there are schemes — such as the Flat Rate Scheme or cash accounting — that may suit particular businesses. Which, if any, is appropriate depends on your circumstances.
A five-minute monthly check
If you are approaching the threshold, check your rolling 12-month taxable turnover each month rather than waiting until the year-end accounts are prepared. By then you may already have been registrable for months.
If your taxable turnover is getting into the high £70,000s or £80,000s, it is worth watching particularly closely — a single good month can take you over.
A five-minute monthly check can save a very expensive surprise later.
If you are unsure whether you are approaching the threshold, or what registration would mean for your pricing, book a consultation.
This article sets out general information and is not advice for your circumstances. Thresholds and rules change.
