Part 2 of a three‑part series on understanding VAT
In the first part of this series, we looked at the basic principles of VAT and how it flows between businesses and HMRC. Now we’re moving on to the next big question: Should you register for VAT?
Do I Need to Register for VAT?
You must register for VAT if your taxable trading income reaches £90,000 or more over any rolling 12‑month period. A few key points:
- This threshold is based on income, not profit.
- You must monitor your turnover on a rolling 12‑month basis, not just your financial year.
- You must notify HMRC within 30 days of exceeding the threshold or risk penalties.
A rolling 12‑month basis means looking at the current month plus the previous 11 months. Many businesses only think in terms of their financial year, so this requires a shift in mindset.
If you’re approaching the threshold, it’s important to start monitoring regularly. Even if you don’t have to register, you may still choose to do so voluntarily.
Should I Voluntarily Register for VAT?
Voluntary registration can be beneficial in several situations.
When it might help:
- You reclaim more VAT than you charge.
This can happen if your purchases carry significant VAT but your sales do not, or if your business is seasonal. - Your customers are VAT registered.
If your clients can reclaim VAT, adding VAT to your prices won’t affect them - but it allows you to reclaim VAT on your own costs. - You expect to exceed the threshold soon.
Registering early can help you prepare, avoid a last‑minute scramble, and prevent the need to notify all customers abruptly.
Before registering voluntarily, it’s worth reviewing the full implications with your accountant.
Can I Backdate My Registration?
You can’t backdate the registration date itself, but you can reclaim VAT on:
- Goods purchased in the last 4 years, if you still have them.
- Services purchased in the last 6 months.
This can provide a useful VAT refund when you first register.
Impact of Registering for VAT
Once registered:
- You must charge VAT on all sales, unless the goods or services are exempt.
- Your prices will effectively increase for customers who cannot reclaim VAT.
- VAT‑registered customers should be unaffected, as they can reclaim the VAT you charge.
- You will need to submit VAT returns and maintain more detailed records.
This additional admin may increase your accounting costs or take up more of your time. We’ll cover the record‑keeping requirements in Part 3.
Different VAT Rates
There are three VAT rates, plus an exemption category:
- Standard Rate – 20%: Applies to most goods and services.
- Reduced Rate – 5%: Covers specific items such as children’s car seats and domestic energy.
- Zero Rate – 0%: Includes essentials such as most food and children’s clothing.
Exempt Supplies
These are not the same as zero‑rated goods. Exempt items do not charge VAT, but they also restrict your ability to reclaim VAT on related purchases. Examples include:
- Insurance.
- Education.
- Fundraising events.
- Membership subscriptions.
- Certain property transactions.
VAT categorisation can be surprisingly complex. The famous Jaffa Cake case - debating whether it was a cake (zero‑rated) or a biscuit (standard‑rated) - is just one example of how nuanced and impactful the rules can be.
Final Part
In the final article of this series, we’ll look at the choices you’ll need to make when registering for VAT and the record‑keeping requirements that come with it.
All figures correct as of 15 January 2025.
Should I voluntarily register for VAT?
It is worth considering voluntarily registering for VAT if you are likely to be reclaiming more VAT than you will be due to pay. This could possibly happen if VAT on your purchases is a much higher than those on your sales, possibly because you are a seasonal business.
It is also possible all of your customers are VAT registered and you think it would have no impact on their decision to purchase from you if you were to also charge them VAT. Therefore you would be in a better position by registering for VAT as you would be able to reclaim the VAT on your purchases.
You may also expect to breach the threshold at some point in the future and decide to register early to get prepared, ensure you are ready and also so that you don't then later need to inform all of your clients about the change.
It will obviously be worth working through all of the consequences voluntarily registering for tax before deciding to do so.
Can I backdate my registration?
You can’t backdate your registration, however one thing you can do when you register for VAT is to reclaim the VAT on anything you have purchased previously and still have in your possession, which can extend back to purchases within the last 4 years. You can also reclaim VAT on services within the last 6 months.
Impact of registering for VAT
As soon as you are registered for VAT, you will need to charge it on all sales to all customers (unless what you are selling is Exempt from VAT). This will mean that your prices will increase. However if your customer is also VAT registered then it should hopefully not have a significant impact in their choice to use you as their supplier as they will be able to reclaim that VAT from HMRC on their next VAT return.
You will also obviously need to submit VAT returns to HMRC. There is a lot of record keeping involved in this, and it will incur more expense with your accountant or take up more of your time. We will discuss this in the final part of this series.
Different rates of VAT
There are three different rates of VAT as well as an exemption for certain goods. Most goods or services will be Standard Rated. This means that they will incur the highest rate of VAT which is currently 20%.*
The next category is reduced rate VAT of 5%. Some goods and services will fall into this category. Items such as children’s car seats and home energy supplies fall into this. Other items fall into the 0% rate of VAT. These are things like food and children’s clothes. The idea is to reduce the burden on the consumer for some of the most essential items.
However the logic of HMRC is a thing of mystery. Certain items will fall into one category whereas other extremely similar items will fall into another category. The well known Jaffa Cake court case on whether it was a biscuit or a cake was a debate about about which category they would fall into in terms of VAT. There is a lot of case law around these sort of technicalities.
Some goods are exempt from VAT. The main difference between this and the zero-rated supplies is due to technical issues around reclaiming VAT on your purchases. Examples of exempt items are insurance, education, fundraising, membership subscriptions and sales of certain properties.
Final part
In the final part of this 3-part blog series, we will talk about the choices you might have to make when registering for VAT, as well as all the record keeping that is required.
* Note that these are the current numbers as of September 2025. If you are reading this at a later date, please ensure that you check the latest figures.
