Understanding the VAT Threshold for UK Businesses
The VAT threshold determines when businesses need to register for VAT. This guide explains how the VAT threshold works, the limits for different VAT schemes, how to check a business’s turnover, and the implications of exceeding these thresholds.

Table of Contents

1. The VAT Threshold for 2021

   • Examples of Exceeding the VAT Registration Threshold

2. VAT Registration Limits

3. VAT Registration and the Self-Employed

4. What Happens Once You Exceed the VAT Limit?

5. Does the VAT Registration Threshold Include VAT?

6. How to Apply for a VAT Exception

7. VAT Threshold History

8. VAT Deregistration

Friendly Disclaimer: Although I’m an accountant, I’m not your accountant. The information provided here is accurate but intended for guidance only. Each situation is unique, so apply this advice carefully. Consult a qualified professional for personalized advice to avoid potential penalties.

1. The VAT Threshold for 2021
For the 2021/2022 tax year, the VAT registration threshold is £85,000. Businesses must register for VAT if:

• Late Registration: Their VAT taxable turnover exceeds £85,000 in the last 12 months (this is assessed on a rolling 12-month basis, not a fixed period).

• Future Turnover: They expect their taxable turnover to exceed £85,000 in the next 30 days.

Examples of Exceeding the VAT Registration Threshold

• Molly’s Scenario: Molly's business has been growing, and by the end of October, she realizes her total turnover for the previous 12 months has exceeded £85,000. She must notify HMRC and register for VAT by 30 November. Her VAT registration will be effective from 1 December, and she must start issuing VAT invoices from that date.

• Carlos’s Scenario: Carlos, a self-employed individual, typically earns around £50,000. On 21 April 2021, he secures a large contract worth £50,000 to be billed within 30 days, which will push his turnover over the VAT threshold. Carlos needs to register for VAT by 21 May 2021, and must start charging VAT from 21 April 2021, even though the contract starts in May.
   

2. VAT Registration Limits
VAT registration thresholds apply to all businesses, including those choosing to opt into various VAT schemes. Here is an overview of the current VAT limits and scheme options:
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3. VAT Registration and the Self-Employed
The VAT registration thresholds apply equally to all businesses, including self-employed individuals (sole traders). Self-employed persons must monitor their VAT taxable turnover just like any other business. Often, self-employed individuals consider forming a limited company when their turnover reaches the VAT threshold to benefit from potential tax advantages of incorporation.

4. What Happens Once You Exceed the VAT Limit?
Once a business exceeds the VAT threshold, it must register for VAT. This means the business will:

• Be required to charge VAT on its sales at the applicable rate.

• Be able to reclaim VAT on its business expenses.

• Report VAT to HMRC, usually on a quarterly basis, though monthly and annual reporting options are also available.

Confused about VAT? Check out our guide on What VAT is and How it Works.

5. Does the VAT Registration Threshold Include VAT?
When determining whether your turnover exceeds the VAT registration threshold, VAT itself should not be included in your calculations. Only include sales that are subject to standard and zero-rated VAT.

6. How to Apply for a VAT Exception
If your business’s turnover temporarily exceeds the VAT threshold, you may apply for a VAT exception from HMRC. This involves providing evidence that your turnover will not exceed the threshold in the next 12 months.

7. VAT Threshold History
The VAT threshold is updated annually as part of the UK Budget. From 2017 to 2021, there were no changes to the VAT threshold, but past changes and future adjustments are possible. Here’s a summary of historical VAT thresholds:
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8. VAT Deregistration
As of 1 April 2017, the VAT deregistration threshold is £83,000. Businesses can deregister for VAT if their taxable turnover falls below this amount. If turnover temporarily drops below the deregistration threshold, businesses may choose to remain registered to avoid the complications of re-registering later, as the deregistration process is irreversible.