What is the VAT threshold in 2025?
The VAT threshold in 2025 is £90,000. If your taxable turnover exceeds this amount in any rolling 12-month period, you must register for VAT.
Detailed Explanation
The VAT registration threshold for 2025/26 is £90,000 of taxable turnover in any rolling 12-month period. This was increased from £85,000 in April 2024. If your business exceeds this threshold, you are legally required to register for VAT with HMRC.
The two tests for mandatory registration:
Historic test: At the end of any month, look back over the previous 12 months. If your total taxable turnover in that period exceeds £90,000, you must register. You have 30 days from the end of that month to notify HMRC. Registration takes effect from the first day of the second month after you exceeded the threshold.
Future test: At any point, if you expect your taxable turnover to exceed £90,000 in the next 30 days alone (for example, you sign a large contract), you must register immediately. Registration takes effect from the date you form that expectation.
Example timeline (historic test): - Your rolling 12-month turnover exceeds £90,000 on 15 March 2026 - End of that month: 31 March 2026 - You must notify HMRC by: 30 April 2026 - Your VAT registration effective date: 1 May 2026 - From 1 May, you must charge VAT on all taxable supplies
What counts as taxable turnover?
Taxable turnover includes all sales of goods and services that are subject to VAT, whether at the standard rate (20%), reduced rate (5%), or zero rate (0%). It does not include: - Exempt supplies (financial services, insurance, education, healthcare) - Sales outside the scope of UK VAT (some overseas transactions) - Capital asset disposals (selling off business equipment)
Zero-rated sales (such as children's clothes, most food, books) do count towards the threshold even though VAT is charged at 0%. This catches some businesses by surprise.
The deregistration threshold: £88,000
If you are already VAT-registered and your taxable turnover falls below £88,000, you can apply to deregister. This is voluntary. You do not have to deregister if you want to remain registered. The £2,000 gap between the registration threshold (£90,000) and the deregistration threshold (£88,000) prevents businesses from constantly registering and deregistering.
Voluntary registration
You can register for VAT voluntarily even if your turnover is below £90,000. This is often beneficial if: - Most of your customers are VAT-registered businesses (they can reclaim the VAT you charge, so it does not affect their cost) - You make significant purchases with VAT that you want to reclaim (equipment, stock, professional services) - You make zero-rated supplies (you charge 0% VAT but can still reclaim input VAT on your costs) - You want to appear larger or more established to potential clients
Voluntary registration is less beneficial if most of your customers are consumers who cannot reclaim VAT, as you would need to either increase your prices by 20% or absorb the VAT from your margins.
VAT schemes for small businesses
Once registered, you can opt for simplified VAT schemes:
Flat Rate Scheme: Pay a fixed percentage of your gross turnover to HMRC instead of tracking individual input and output VAT. The percentage depends on your trade sector (e.g., 14.5% for computer and IT consultancy, 16.5% for management consultancy). In the first year, you get a 1% discount. This scheme is available if your taxable turnover is £150,000 or less.
Annual Accounting Scheme: Submit one VAT return per year instead of quarterly. Make advance payments based on estimated liability, with a balancing payment at year end. Available if turnover is under £1.35 million.
Cash Accounting Scheme: Account for VAT when you receive or make payment, rather than when you issue or receive invoices. This helps cash flow if you have slow-paying customers. Available if turnover is under £1.35 million.
VAT return frequency and deadlines
Most businesses submit quarterly VAT returns. The return and payment are both due one month and 7 days after the end of the VAT quarter. For example, a quarter ending 31 March has a deadline of 7 May.
Under Making Tax Digital (MTD), you must keep digital records and submit returns using compatible software. This applies to all VAT-registered businesses.
Penalties for late registration
If you fail to register on time, HMRC will register you from the date you should have been registered. You will owe VAT on all taxable sales from that date, even though you did not charge VAT to your customers. This means the VAT comes out of your margin. Additionally, HMRC may charge a late registration penalty of up to 15% of the VAT owed during the late period.
Source: HMRC VAT Registration Threshold 2024/25
Real-World Examples
Rapid Business Growth
Your limited company has experienced a surge in sales. In the last 11 months, your taxable turnover was £82,000, and you anticipate another £10,000 in sales this month. You've now exceeded the £90,000 VAT threshold and are legally obliged to register for VAT.
Future Sales Forecast
You're launching a new product line and project that in the next 30 days, your sales will reach £95,000. Even though your current turnover is significantly lower, the projected sales exceeding the £90,000 threshold trigger an immediate requirement to register for VAT with HMRC.
Falling Below the Deregistration Threshold
After a period of high growth, your sales have slowed down. Your taxable turnover for the past year is now £86,000. Since you are below the deregistration threshold of £88,000 you can now apply to deregister from VAT, although you may still choose to remain VAT registered voluntarily.
Common Mistakes to Avoid
- Assuming the VAT threshold only applies to a calendar year instead of a rolling 12-month period.
- Forgetting to monitor projected sales and only focusing on historical turnover, potentially missing the 30-day rule.
- Failing to register for VAT promptly after exceeding the threshold, leading to potential penalties from HMRC.
- Not considering the benefits of voluntary VAT registration, even when turnover is below the threshold, especially if your customers are VAT registered.
Frequently Asked Questions
What counts as taxable turnover for VAT registration?
Taxable turnover includes all sales subject to VAT at any rate: standard (20%), reduced (5%), and zero (0%). It excludes exempt supplies (financial services, insurance, certain education and healthcare), sales outside the scope of UK VAT, and capital asset disposals. Importantly, zero-rated sales like children's clothing, most food, and books do count towards the threshold even though no VAT is actually charged.
How quickly do I need to register for VAT after exceeding the threshold?
You have 30 days from the end of the month in which you exceeded the threshold to notify HMRC. Your registration then takes effect from the first day of the second month after you exceeded the threshold. For example, if you exceeded £90,000 on 15 March, you must notify by 30 April, and registration starts 1 May. Late registration means you owe VAT from when you should have registered, even though you did not charge it.
Should I register for VAT voluntarily if I am below the threshold?
It depends on who your customers are. If most are VAT-registered businesses, they can reclaim the VAT you charge, so registration costs them nothing and you can reclaim VAT on your purchases. If most customers are consumers, registration effectively means raising your prices by 20% or absorbing it from your margins. Voluntary registration is also beneficial if you make zero-rated supplies, since you charge 0% but reclaim input VAT.
What is the VAT Flat Rate Scheme and who should use it?
The Flat Rate Scheme lets you pay a fixed percentage of your gross turnover to HMRC instead of tracking every individual input and output VAT transaction. Percentages vary by sector (e.g., 14.5% for IT consultancy). You get a 1% first-year discount. It simplifies administration but means you cannot reclaim VAT on most purchases. Available if your taxable turnover is under £150,000.
What happens if I register late for VAT?
HMRC will backdate your registration to when you should have registered. You owe VAT on all taxable sales from that date, even though you did not charge your customers. The VAT comes out of your margin. HMRC may also charge a late registration penalty of up to 15% of the VAT owed during the late period, plus interest.
Can I deregister from VAT if my turnover drops?
Yes, if your taxable turnover falls below the deregistration threshold of £88,000, you can apply to deregister. This is voluntary, not automatic. If you voluntarily registered, you may need to wait at least two years before deregistering. When you deregister, you may need to account for VAT on stock and assets you hold at that date.
Do zero-rated sales count towards the VAT threshold?
Yes. Zero-rated supplies are still taxable supplies, they are just taxed at 0%. This means they count towards the £90,000 registration threshold. Businesses selling zero-rated goods (food, books, children's clothing) can be caught by surprise when their turnover exceeds the threshold even though they have never charged any actual VAT.
How often do I need to submit VAT returns?
Most businesses submit quarterly VAT returns. The deadline is one month and 7 days after the end of each quarter. Under Making Tax Digital, all VAT-registered businesses must keep digital records and file using compatible software. You can opt for the Annual Accounting Scheme to file one return per year if your turnover is under £1.35 million.
Practical Tips
- Set up a monthly turnover tracker to monitor your sales against the VAT threshold; use a spreadsheet or accounting software.
- If you're approaching the threshold, review your pricing strategy to account for the impact of VAT on your products or services.
- Consult with a qualified accountant well in advance of potentially exceeding the threshold to discuss your options and ensure compliance.
- If you believe you're eligible to deregister from VAT, submit your application to HMRC promptly to avoid unnecessary VAT liabilities.
Related Questions
When do I need to register for VAT?
You must register for VAT when your taxable turnover exceeds £90,000 in any 12-month period, or if you expect to exceed it in the next 30 days.
What is the Flat Rate VAT Scheme?
The Flat Rate VAT Scheme lets you pay a fixed percentage of your turnover as VAT instead of calculating VAT on every sale and purchase. It simplifies VAT accounting for small businesses.
How often do I submit VAT returns?
Most businesses submit VAT returns quarterly, with payment due one month and seven days after the period ends. You can also opt for monthly or annual returns in certain circumstances.
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