VAT Registration for Small Businesses: When and Why You Should Register

Value Added Tax (VAT) is a tax that's added to most goods and services sold by VAT-registered businesses. Understanding when you need to register is a key milestone for any growing UK business.

Compulsory Registration

You must register for VAT if your VAT taxable turnover for the last 12 months was over the registration threshold. The current threshold is £85,000 (for 2024/25). This isn't based on the tax year, but on any rolling 12-month period. You also need to register if you expect your turnover to go over the threshold in the next 30 days alone.

Voluntary Registration

Even if your turnover is below the threshold, you can choose to register for VAT voluntarily. Why would you do this?

• Reclaiming VAT: The biggest advantage is that you can reclaim the VAT you pay on business expenses and purchases. If you buy a lot of VAT-able goods or services, this can be a significant saving.
• Business Credibility: Being VAT registered can make your business appear larger and more established to potential clients.

The Downsides of Registering

However, there are reasons to delay registering if you don't have to:

• Administrative Burden: You must keep detailed VAT records and submit regular VAT returns to HMRC, typically every quarter. This is now done through the Making Tax Digital (MTD) system.
• Competitive Pricing: If your customers are the general public or small businesses that are not VAT registered, you will have to either absorb the 20% VAT cost or add it to your prices, making you more expensive than non-registered competitors.

In summary: If most of your customers are VAT-registered businesses, voluntary registration is often beneficial. If you sell mainly to the public, it's usually better to wait until you reach the compulsory threshold.