VAT is the tax small businesses fear most — partly bureaucracy, mostly the cliff-edge design of the registration threshold. Understanding the mechanics turns it from threat to routine.
The £90,000 Threshold
Cross £90,000 of taxable turnover in any rolling 12 months and registration is compulsory. It is a cliff, not a taper: £1 over and VAT applies to everything you sell. For consumer-facing businesses that cannot pass 20% on, this can genuinely mean earning less at £95,000 turnover than at £89,000 — the reason so many sole traders hover just below.
How VAT Actually Flows
You charge output VAT on sales, reclaim input VAT on purchases, and pay HMRC the difference. VAT-registered customers do not care about your VAT (they reclaim it); consumers feel every penny. Your position in the chain decides how painful registration is.
The Schemes
- Flat Rate: pay a fixed percentage of gross turnover (varies by trade), keep the difference, lose most input reclaims — simpler, occasionally profitable, but the 16.5% limited-cost-trader rate killed the old gravy train
- Cash accounting: pay VAT when customers pay you, not when you invoice — a cashflow lifesaver with slow payers
- Annual accounting: one return a year with instalments
When Registering Early Pays
If your customers are VAT-registered businesses and you buy significant VATable inputs, voluntary registration below the threshold recovers input VAT at no competitive cost — common for trades, consultants and B2B services.