VAT registration — when, why, and the £85k threshold maths

The UK VAT threshold has been £90,000 since April 2024 (rising from £85k). Many of the dynamics around the threshold are misunderstood — founders register too late, others register voluntarily without thinking through the maths. This is the working summary for 2026.

The threshold itself

You must register for VAT if:

• Your taxable turnover in the last 12 months exceeds £90,000, OR
• You expect to exceed £90,000 in the next 30 days alone

The rolling 12-month threshold trips most founders. It's not your last accounting year — it's any 12-month period ending today.

Voluntary registration below threshold

You can register voluntarily at any turnover level. Whether you should depends on three questions:

1. Who are your customers?

• B2B (VAT-registered customers): voluntary registration is usually beneficial. Your customers reclaim the VAT you charge them; meanwhile you reclaim VAT on your costs. Net financial impact: positive (you get input VAT back) with no negative customer impact.
• B2C (consumers): voluntary registration is usually harmful. Your prices effectively go up by 20% (or you absorb the VAT, reducing margin). Don't register until you must.
• Mixed: usually break-even — calculate input VAT reclaim against B2C price-rise hit.

2. What's your input VAT position?

If you have substantial input VAT — e.g. you're investing heavily in equipment, software subscriptions, agency fees — voluntary registration lets you reclaim 20% on all of it. For a pre-revenue startup spending £5k/mo on legal, accounting, software, and agency, that's £1k/mo back into the company. Material.

3. Customer perception

Larger B2B customers (especially enterprise procurement) sometimes prefer VAT-registered suppliers. Not material legally, but it can sit on the "professional vs not" continuum in their mental model.

What changes at £90k

The arithmetic at threshold:

• If you cross by £1, you owe VAT on the full taxable turnover from the registration date — not just the £1 over.
• Most founders miss the threshold by 30-60 days. The penalty for late registration is up to 100% of the VAT due, though HMRC typically applies 5-15%.
• You get 30 days to register from the date you crossed the threshold.

The Flat Rate Scheme

Available for businesses with turnover under £150k. You charge VAT at 20% on sales as normal, but pay HMRC a flat percentage of your gross turnover (varies 4-16.5% by sector). You can't reclaim input VAT (with one exception: capital assets over £2k).

When the FRS is right: low input VAT business (e.g. consultancy with minimal expenses). Net margin on VAT collected is positive.
When it's wrong: high input VAT business or capital-intensive. You're effectively gifting HMRC the difference.

OSS for EU sales

If you sell to EU consumers, the UK-EU OSS replaced MOSS post-Brexit. You can declare cross-border VAT through a single quarterly return rather than registering in every EU member state. Different rules apply for goods vs digital services. The forthcoming Incorpwise VAT-OSS Routing Engine (Q3 2026) handles this automatically.

Most founders register for VAT either 6 months too early (and burn margin) or 60 days too late (and incur penalty). The right time depends on customer mix and input VAT — not on hitting a number.

How Incorpwise handles VAT

VAT registration is a separate £75 service from formation. Includes the threshold-monitoring tool (alerts you 30 days before you're projected to hit £90k based on current trajectory), Flat Rate Scheme calculation, and OSS enrolment if you have EU customers. Bundled into the Business in a Box at no extra cost when relevant.