Value added tax - Registration requirements

Learning Outcomes

This article outlines VAT registration requirements and related obligations for SQE1 FLK1, including:

• Identifying when the compulsory VAT registration threshold is met using rolling 12-month historic and 30-day future tests, and calculating taxable turnover precisely
• Distinguishing taxable, exempt, zero-rated and outside-the-scope supplies and determining which transactions count towards the registration threshold
• Determining the correct timing, notification obligations, and effective date of registration, and predicting the legal and financial consequences of late registration
• Evaluating when voluntary registration is beneficial or disadvantageous, particularly for start-ups and businesses making mainly zero-rated supplies
• Applying HMRC rules on VAT invoicing, digital record-keeping, return submission frequencies, and payment deadlines following registration
• Analysing when exemption from registration is available for businesses making only zero-rated supplies, and when that exemption must be withdrawn
• Applying partial exemption principles to restrict or apportion input VAT recovery where both taxable and exempt supplies are made
• Recognising when immediate registration is required for non-established taxable persons (NETPs) and how the absence of a UK threshold affects compliance
• Using structured problem-solving to apply these rules accurately to SQE1-style multiple-choice questions and practical scenarios

SQE1 Syllabus

For SQE1, you are required to understand VAT registration requirements from a practical standpoint, with a focus on the following syllabus points:

• The compulsory VAT registration threshold and how taxable turnover is calculated
• The difference between taxable, exempt, and zero-rated supplies for registration purposes
• The process and timing for VAT registration (historic and future tests)
• The consequences of late registration and effective date of registration
• The option and implications of voluntary VAT registration
• Ongoing obligations after registration, including VAT invoicing and record-keeping
• The definitions of taxable person, course of business, value of supply, and the role of input and output tax in returns
• Exemption from registration where a person makes only zero-rated supplies
• Deregistration rules and thresholds

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the current VAT registration threshold, and how is it calculated?
2. What is the difference between zero-rated and exempt supplies for VAT registration?
3. When must a business register for VAT if it expects to exceed the threshold in the next 30 days?
4. What are two main advantages and two disadvantages of voluntary VAT registration?

Introduction

Value added tax (VAT) is a tax on the supply of goods and services in the UK. Businesses that meet certain criteria must register for VAT and comply with related obligations. For SQE1, you must know when registration is compulsory, how the threshold is calculated, the difference between compulsory and voluntary registration, and the main post-registration requirements.

Key Term: taxable person
A person who makes or intends to make taxable supplies and who is, or is required to be, registered under the Value Added Tax Act 1994 (VATA 1994).

Key Term: course of business
Includes any trade, profession or vocation (VATA 1994, s 94). Supplies in the course or furtherance of business include disposals of a business or of its assets.

Key Term: value of supply
The net amount on which VAT is charged—what the goods or services would cost if VAT were not charged. A price is treated as VAT-inclusive unless stated otherwise.

Compulsory VAT Registration

A business must register for VAT if its taxable turnover exceeds the registration threshold set by law.

Key Term: taxable turnover
The total value of all taxable supplies (excluding VAT itself) made in the UK by a business in a rolling 12-month period.

Key Term: taxable supplies
Supplies of goods or services subject to VAT at the standard, reduced, or zero rate. Excludes exempt and outside-the-scope supplies.

The current VAT registration threshold is £90,000. This is not a fixed calendar year but a rolling 12-month period. Businesses must monitor turnover continuously. Only supplies with a UK place of supply that are subject to VAT (including zero-rated) are counted; exempt supplies and supplies outside the scope of UK VAT are ignored.

Key Term: output tax
VAT charged by a VAT-registered business on its taxable supplies (sales).

Key Term: input tax
VAT incurred by a VAT-registered business on purchases and expenses for the purposes of its business.

The Historic and Future Tests

There are two main tests for compulsory registration:

• Historic test: If taxable turnover for the past 12 months exceeds £90,000, registration is required.
• Future test: If taxable turnover is expected to exceed £90,000 in the next 30 days alone, registration is required immediately.

The historic test requires continuous monitoring of the rolling 12 months. The future test is triggered by a single event or contract that will cause taxable turnover in the next 30 days to exceed the threshold.

Timing and Effective Date

If the threshold is exceeded under the historic test, the business must notify HMRC within 30 days of the end of the month in which the threshold was breached. Registration takes effect from the first day of the second month after the threshold was exceeded.

If the threshold will be exceeded in the next 30 days (future test), the business must notify HMRC by the end of that 30-day period. Registration takes effect from the date the business realised it would exceed the threshold (typically the date of the event or contract giving rise to the expectation).

Key Term: effective date of registration
The date from which a person is treated as VAT-registered by law. Under the historic test, it is the first day of the second month following the month in which the threshold was exceeded. Under the future test, it is the date on which the person first knew it would exceed the threshold in the next 30 days.

Example

A retailer’s taxable turnover reaches £92,000 on 15 June (historic test). They must notify HMRC by 31 July, and registration takes effect from 1 August.

A consultancy signs a contract on 1 September for £95,000 to be delivered in 30 days (future test). They must notify HMRC by 30 September, and registration takes effect from 1 September.

What Counts Towards the Threshold?

Only taxable supplies count towards the threshold. Exempt supplies (such as insurance, most financial services, and some education or health services) are ignored. Zero-rated supplies count—these include most food, children’s clothing, books, and exports of goods from the UK. Supplies outside the scope of UK VAT (for example, services with a place of supply outside the UK) do not count.

Key Term: exempt supplies
Supplies of goods or services that are not subject to VAT and do not count towards the registration threshold. No input VAT can be reclaimed on costs related to exempt supplies.

Key Term: zero-rated supplies
Taxable supplies charged at 0% VAT (e.g., most food, children’s clothing, books). They count towards the threshold, and input VAT can be reclaimed.

Supplies of business assets (for example, the sale of equipment) normally count if they are taxable supplies made in the course of business. Grants and donations with no supply in return, employee wages, dividends and most statutory fees are outside the scope and do not count.

Worked Example 1.1

A bakery sells bread (zero-rated), cakes (standard-rated), and provides food services (standard-rated). In the last 12 months, it made £60,000 from bread, £30,000 from cakes, and £10,000 from food services. Must it register for VAT?

Answer:
Yes. Both zero-rated and standard-rated sales are taxable supplies. Total taxable turnover is £100,000, exceeding the £90,000 threshold. Registration is compulsory.

Voluntary VAT Registration

A business with taxable turnover below £90,000 may register for VAT voluntarily.

Advantages

• Can reclaim input VAT on purchases and expenses
• May improve business credibility with suppliers and customers
• Ensures readiness to trade with VAT-registered clients who expect VAT invoices

Disadvantages

• Must charge VAT on sales, potentially increasing prices for non-business customers
• Must comply with VAT record-keeping and return requirements
• Cash flow impact—collecting output VAT and timing of input VAT recovery must be managed

A special point arises for businesses making only zero-rated supplies (for instance, a business selling printed books only). Even if such a business exceeds the threshold, it can apply for exemption from registration if it does not wish to reclaim input tax. If later it begins making standard or reduced rate supplies, the exemption must be withdrawn and registration may become compulsory.

Worked Example 1.2

A freelance designer earns £40,000 per year from business clients. She registers for VAT voluntarily. What are the main implications?

Answer:
She must charge VAT on her services, submit VAT returns, and can reclaim input VAT on business expenses. Her business clients can usually reclaim the VAT, so pricing is not affected for them.

Worked Example 1.3

A publisher sells only zero-rated children’s books and has taxable turnover of £120,000. Must it register?

Answer:
It makes only zero-rated supplies, which are taxable supplies. Registration would ordinarily be compulsory above the threshold. However, it can apply to HMRC for exemption from registration because all supplies are zero-rated. If it chooses to register (for input tax recovery), the normal obligations apply.

Registration Process and Post-Registration Duties

How to Register

Registration is usually completed online with HMRC. The business provides details of its activities, turnover, bank account, anticipated taxable supplies, and any special arrangements (such as group membership or exemption requests). HMRC issues a VAT registration number covering all businesses operated by that person (if applicable), or the partnership or company, as relevant.

Key Term: VAT invoice
A document issued by a VAT-registered business showing the amount of VAT charged, the VAT registration number, and other required details (including supplier and customer details, tax point, description of goods/services, VAT rate, net amount, and VAT amount).

Effective Date of Registration

The effective date is set by law based on when the threshold is exceeded or expected to be exceeded. From this date, the business must:

• Charge VAT on all taxable supplies
• Issue VAT invoices with the business’s VAT registration number where required
• Submit VAT returns (usually quarterly, though monthly or annual schemes may apply)
• Keep VAT records (including VAT account, invoices and supporting documentation) for at least six years and in digital form compliant with Making Tax Digital

Key Term: Making Tax Digital (MTD) for VAT
The requirement for VAT-registered businesses to keep digital records and submit returns using compatible software. It applies to all VAT-registered businesses.

Record-Keeping and Returns

Registered businesses must keep records of all sales and purchases, VAT invoices, and a VAT account summarising output tax and input tax. Returns are usually submitted quarterly and must be filed and paid within one month from the end of the quarter. HMRC may allow or require monthly returns in certain circumstances (for example, where regular repayments are expected). The VAT due to HMRC is output tax less input tax; if input tax exceeds output tax for a period, a repayment is due.

Where all supplies are zero-rated, returns will often be repayment returns; where some supplies are exempt, input tax recovery is restricted.

Partial Exemption

If a business makes both taxable and exempt supplies, it may only reclaim input VAT on costs related to taxable supplies. Special rules apply for calculating recoverable input VAT, including attribution of costs to taxable and exempt supplies and, for residual costs, applying a standard method or a special method agreed with HMRC.

Key Term: partial exemption
The regime that restricts input VAT recovery for businesses making both taxable and exempt supplies. Input tax is attributed to taxable and exempt activities; residual input tax is apportioned, and only the taxable proportion is recoverable.

Penalties for Late Registration

Failure to register on time can result in:

• Assessment of VAT due from the effective date of registration on all taxable sales (even if VAT was not charged to customers)
• Interest on the unpaid VAT
• Penalties for failure to notify (under HMRC’s penalty regime), which are calculated by reference to the potential lost revenue and the taxpayer’s behaviour (non-deliberate, deliberate, or deliberate and concealed)

The VAT due is generally calculated on the VAT-inclusive basis where VAT was not charged—meaning the amounts received are treated as including VAT. Businesses may issue VAT invoices retrospectively where permitted to recover VAT from customers, but this is not always possible commercially or contractually.

Exam Warning

If a business exceeds the threshold but fails to register, it must pay VAT on all taxable sales from the date registration should have taken effect, even if VAT was not charged to customers. Penalties and interest may also apply.

Worked Example 1.4

A consultancy exceeded the threshold under the historic test on 12 March but notified HMRC on 10 May. What are the consequences?

Answer:
Registration should have taken effect from 1 May (first day of the second month after March). The consultancy will be liable for VAT on taxable supplies from 1 May, with interest and penalties for failure to notify. Prices charged without VAT are treated as VAT-inclusive, reducing net revenue.

Special Cases

Non-established taxable persons (NETPs)—those with no UK establishment—must usually register from their first taxable supply in the UK; there is no UK threshold for NETPs. Partnerships can register in the name of the partnership. Changes to the scale or nature of supplies (e.g., beginning to make standard-rated supplies after having only zero-rated supplies) can alter registration obligations and any previous exemption from registration may need to be withdrawn.

Worked Example 1.5

A non-UK software developer with no UK establishment sells standard-rated licences to UK customers. It expects £20,000 of UK sales. Must it register?

Answer:
Yes. As a non-established taxable person, it must register from its first UK taxable supply. There is no threshold for NETPs.

Worked Example 1.6

A pharmacy sells exempt prescription services and standard-rated over-the-counter goods. How does partial exemption affect input tax recovery?

Answer:
Input tax directly attributable to exempt prescription services is not recoverable. Input tax directly attributable to taxable sales is recoverable. Residual input tax (e.g., on shared overheads) must be apportioned under the partial exemption rules, and only the taxable proportion is recoverable.

Deregistration

A business must deregister if it stops making taxable supplies. A business can apply to deregister voluntarily if taxable turnover is expected to fall below the deregistration threshold (currently £88,000). HMRC will set the effective date of deregistration. After deregistration, VAT must not be charged on supplies, and input tax cannot be recovered, save in limited post-deregistration circumstances. Output tax may be due on certain assets and stock on hand if input tax was recovered on them; HMRC guidance sets out the calculation.

Worked Example 1.7

A sole trader’s taxable turnover falls to £60,000 and is expected to remain below £88,000. Can they deregister?

Answer:
Yes, they can apply to HMRC for voluntary deregistration. HMRC will set an effective date. They should account for VAT due on any stock and assets on which input tax was claimed, if required.

Key Point Checklist

This article has covered the following key knowledge points:

• VAT registration is compulsory if taxable turnover exceeds £90,000 in any rolling 12-month period or is expected to do so in the next 30 days.
• Taxable turnover includes standard, reduced, and zero-rated supplies, but not exempt supplies or supplies outside the scope of UK VAT.
• Registration must be notified to HMRC within set deadlines; the effective date of registration is set by law under the historic and future tests.
• Voluntary registration is possible below the threshold, with both advantages and disadvantages. If only zero-rated supplies are made, exemption from registration may be available.
• VAT-registered businesses must charge VAT, issue compliant VAT invoices, submit VAT returns (usually quarterly), and keep digital VAT records in line with Making Tax Digital.
• If a business makes both taxable and exempt supplies, input tax recovery is restricted under partial exemption rules.
• Failure to register on time can lead to assessments, interest, and penalties, with VAT due from the effective date of registration.
• Deregistration is compulsory if taxable supplies cease and may be requested if expected turnover falls below £88,000.

Key Terms and Concepts

• taxable turnover
• taxable supplies
• exempt supplies
• zero-rated supplies
• taxable person
• course of business
• value of supply
• effective date of registration
• VAT invoice
• output tax
• input tax
• partial exemption
• Making Tax Digital (MTD) for VAT