When should you register for VAT?

When should you register for VAT?

Written by scott291074

April 12, 2021


As a contractor in business on your own account, your company may need to register for VAT.

You may need to consider this when you set up your company for the first time, or you have been in business a while running your own company.

My VAT guide covering VAT in more detail gives you an overall insight into how VAT works.

Under HMRC’s rules, a business needs to register for VAT if its VAT taxable annual sales go over £85,000 (the ‘threshold’), or the business knows that it will do.

A business’ VAT taxable sales are the total of all goods that you sell and the services that you provide that are not VAT exempt.

VAT registration

1 Compulsory registration

A business needs to register for VAT if:

  • it expects its VAT taxable sales to be more than £85,000 in the next 30 day period 
  • the business had a VAT taxable sales of more than £85,000 during the last 12 months

Other registration instances

A business might also need to register for VAT in some other cases. It will depend on the kinds of goods or services it sells and where it sells them. You can find more info on this on the HMRC website.

If the business exceeds the VAT threshold in the next 30 day period

A business must register if it discovers that its total VAT taxable sales are going to be more than £85,000 in the next 30 day period.

The business will then need to register by the end of those 30 days. Its effective date of registration is the date that it discovers this, not the date its sales went over the threshold.

If the business exceeded the VAT threshold in the past 12 months

A business must register if, by the end of any month, its total VAT taxable sales for the last 12 months was over £85,000.

The business needs to register within 30 days of the end of the month, after which it exceeds the threshold. Its effective date of registration is the first day of the second month after it goes over the threshold.

Late registration

If a business registers late, it must pay what it owes from the date that it should have set up its registration.

The business may also receive a penalty. The level of penalty will depend on how much it owes and how late its registration is.

2 Voluntary registration

A business can register voluntarily if its business sales are below £85,000.

Many contractors decide to register even if they are beneath the VAT threshold. The reason for this is because they can reclaim the VAT on their business expenses.

Being registered for VAT also gives your business more credibility in the eyes of certain recruitment sectors.

Invoicing your clients once you are registered for VAT

Once registered for VAT you will need to know how to add VAT when you create your invoices for your work. If you are also recharging expenses to your client you will also need to know how to do this.

Final thoughts

Once registered for VAT, a business must charge VAT on its charges to its customers. Charging VAT on your invoices applies from the date of VAT registration.

The current standard rate of VAT is 20%.

The above should give a good guide as to when you need to register for VAT. There are also benefits to registering even if you are not required to do so. Of course, this depends on your own situation.

Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/

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