The VAT registration threshold is £90,000 of taxable turnover measured over any rolling 12 months, not your financial year. That is why people cross it without noticing: there is no year end to prompt you, and the month you go over might be an ordinary month with one unusually large invoice in it.
If you have just realised, the position is almost certainly fixable. It is worse the longer you leave it, because the VAT you should have charged is accruing whether or not you charged it.
How the VAT threshold actually works
At the end of every month, add up your taxable turnover for the previous 12 months. If that total is over £90,000, you have crossed the threshold, even if the current tax year or accounting year is nowhere near it.
A quiet autumn followed by a strong spring can put you over in April on the strength of turnover from the previous May. Our VAT threshold calculator will tell you how close you are on a rolling basis, which is the only basis that matters.
The VAT threshold applies to the business, not to a particular legal form, so it works the same way whether you are a sole trader or a limited company. Incorporating is not a reset button.
The two registration tests
There are two, and they work completely differently. Most people only know the first.
| Backward looking | Forward looking | |
|---|---|---|
| Trigger | Taxable turnover for the last 12 months goes over £90,000 | You realise turnover will go over £90,000 in the next 30 days alone |
| Register by | 30 days after the end of the month you went over | The end of that 30 day period |
| Registered from | The first day of the second month after you went over | The date you realised |
HMRC's own worked example for the backward test: on 15 July your rolling 12 month turnover hits £100,000 for the first time. You must register by 30 August, and your effective date of registration is 1 September. The full rules are on the GOV.UK page on when to register.
The test that backdates your registration
The forward looking test is the one that catches people, because it does not give you the breathing space the other one does.
If you realise your taxable turnover will exceed £90,000 in the next 30 days on its own, you must register by the end of those 30 days, and you are registered from the date you realised. Not the date the money arrives. Not the start of next month. The day you knew.
HMRC's example makes it concrete: on 1 May you agree a £100,000 contract, to be paid at the end of May. You must apply by 30 May, and your effective date of registration is 1 May. So the contract that triggered it is inside your registration, and VAT is due on it.
Signing one large contract can therefore make you VAT registered from the day you signed, before you have invoiced anything. If that is your situation, the price you quoted needs checking before you invoice, not after.
What late registration costs
Two things, and the second is usually the smaller one.
First, you owe VAT on everything you have sold since the date you should have been registered. HMRC does not waive that because you did not know. If you have been invoicing without VAT for four months, that VAT is still due.
Second, there may be a penalty, and how big depends on how much you owe and how late you are.
The first is what actually hurts. In theory you can go back to customers and ask for the VAT. In practice, if they are consumers or not VAT registered themselves, they will decline, and it comes out of your margin. On £40,000 of sales at 20 per cent that is a £6,667 problem, because the VAT is treated as being inside the price you already charged rather than on top of it.
Which is the honest argument for dealing with this the week you notice rather than the month after.
The exception for a temporary spike
This is the part most people have never heard of.
If your taxable turnover went over the threshold temporarily, you can apply for a registration exception. You are asking HMRC to accept that the next 12 months will be below the threshold, so registering now makes no sense.
Two things to be clear about. It is an application, not a choice: HMRC considers it and writes to confirm. And if they refuse, they register you. So it is worth applying where the spike is genuinely one off, such as a single large project, and not worth relying on where the growth is real.
Going the other way, if you are already registered and turnover falls below £88,000 you can apply to cancel your registration. That figure is deliberately lower than the registration threshold so businesses do not move in and out of VAT every time they have a good quarter.
What counts towards taxable turnover
More than people expect, which is part of why the threshold arrives early. HMRC's guidance on calculating turnover includes:
- standard rated, reduced rated and zero rated goods, so zero rated sales still count towards the threshold even though no VAT is charged on them
- goods you hired or loaned to customers
- business goods used for personal reasons
- goods bartered, part exchanged or given as gifts
- services from overseas businesses you had to apply the reverse charge to
- goods and services under the domestic reverse charge
- building work over £100,000 your business did for itself
What does not count is genuinely VAT exempt or out of scope income. The zero rated point is the one that catches people, because it feels like it should not count and it does.
What to do this week
- Work out your rolling 12 month taxable turnover to the end of last month. Not your year to date, the last 12 months.
- Do the same for the 11 months before that, so you can see whether you crossed earlier than you thought. The date you crossed sets everything else.
- Check whether anything in the pipeline triggers the forward test on its own.
- If you are over, register for VAT. If the spike was genuinely one off, apply for the exception at the same time.
- Work out what you owe on sales since your effective date, and whether any customers can be invoiced for it. Some VAT registered customers will not mind at all.
- Sort out software before your first return is due. Making Tax Digital means digital records and compatible software, and our comparison of Xero and QuickBooks covers the practical differences.
If you think you have gone over and you are not sure when, send us 18 months of sales figures and we will tell you the date you crossed, the deadline you are working to, and what registering will actually cost you. It is a short piece of work and it turns an open ended worry into a number.
Frequently Asked Questions
£90,000 of taxable turnover. It is measured on a rolling 12 months rather than your financial year, so you have to look back over the last 12 months at the end of every month, not once a year.
If you went over on the backward looking test, you must register within 30 days of the end of the month you went over. Your registration takes effect from the first day of the second month after you crossed it.
You have to pay VAT on everything you have sold since the date you should have been registered, and you may also face a penalty depending on how much you owe and how late you are. Most customers will not accept a retrospective invoice, so the VAT usually comes out of your own margin.
Possibly. You can apply for a registration exception if your taxable turnover went over the threshold temporarily. HMRC considers it and writes to confirm. If they refuse, they register you, so it is an application rather than a decision you can make yourself.
You can apply to cancel your registration if your taxable turnover falls below £88,000. That is deliberately lower than the £90,000 registration threshold, so you do not move in and out of VAT every time you have a good month.