VAT registration threshold: £90,000, explained properly

The £90,000 threshold is a rolling total, not a tax year

This is the part people get wrong most often. HMRC does not check your turnover once a year. It looks at your taxable turnover for the last 12 months, checked continuously, month by month. So a business could be well under the threshold in January and cross it in July, just from the last year's trading up to that point, regardless of when its financial year starts or ends.

Two separate tests, either one triggers registration

There are actually two ways you can become liable to register:

• Backward-looking test: your taxable turnover for the past 12 months has already gone over £90,000.
• Forward-looking test: you expect your taxable turnover to go over £90,000 in the next 30 days alone, for example because of one large contract.

Either one means you need to register, even if the other test isn't met.

How much time you have to register

For the backward-looking test, you have 30 days from the end of the month you crossed the threshold in. Your registration then starts on the first day of the second month after that.

For the forward-looking test, you have 30 days from the point you realise you're about to cross it. In this case, registration starts from the date you realised, not from when the turnover actually lands.

What counts towards the £90,000?

Your taxable turnover covers standard-rated, reduced-rated and zero-rated sales (see our guide to VAT rates for what falls under each). It also includes a few other things, like hired goods and certain reverse-charge services. It does not include VAT-exempt sales, such as insurance, or sales made outside the UK.

Registering before you have to

You don't have to wait until you hit the threshold. Registering early lets you reclaim VAT on business purchases. It can also make your invoices look more established to clients who are VAT-registered themselves.

There's a cost to this too. Once you're registered, you have to charge VAT on everything you sell, file returns on time, and keep proper VAT records. Weigh both sides up before registering early.

What happens if you register late

Say you should have registered on a certain date but didn't. HMRC still expects VAT on everything you sold from that date on, whether you charged your customers for it at the time or not.

HMRC can also add a penalty on top. It's based on how much VAT is owed and how late you were. The longer it's left, the more it tends to cost, so it's worth registering as soon as you know you're over the threshold.

Deregistering: the £88,000 threshold

Once you're registered, you can apply to cancel your registration if you expect your taxable turnover for the next 12 months to fall below £88,000, £2,000 lower than the registration threshold. That gap exists so a business sitting right on the line isn't forced to register and deregister every few months as turnover moves slightly up and down.