A joiner in Stoke does a good autumn. Three kitchens, a run of bedroom fit-outs, and a commercial job that came through a friend. He knows roughly what his year looks like because his accountant tells him in July. What he does not know is that by the end of November his previous twelve months of takings came to £91,400, and that he had thirty days from the end of that month to tell HMRC.
The letter arrives in March. He has been trading for four months as a business that should have been charging VAT, and HMRC wants the VAT on those four months whether he collected it or not.
The test is rolling, not annual
The VAT registration threshold has been £90,000 since 1 April 2024, raised from £85,000 where it had sat since 2017. It is reviewed at fiscal events, so treat the figure as current rather than permanent.
The important part is not the number. It is how it is measured. There are two tests and you have to fail neither.
- The backward look: at the end of every month, add up your VAT-taxable turnover for the previous twelve months. Not your financial year. The previous twelve months, ending on the last day of that month. If it exceeds £90,000 you must register within thirty days of the end of that month, and you are registered from the first day of the month after that.
- The forward look: if you expect your VAT-taxable turnover in the next thirty days alone to exceed £90,000, you must register immediately, and you are registered from the date you formed that expectation. This one catches people who win a single large contract.
The backward look is what trips up the joiner. He is watching his accounting year, which ends in April. The rolling test does not care. It runs a twelve-month window across his month ends all year round, and the month he crosses it is the month the clock starts.
Turnover here means VAT-taxable turnover: everything you sell that is not exempt or outside the scope. Zero-rated sales count towards the threshold even though the VAT on them is 0%. Exempt supplies, such as most insurance and certain education and health services, do not.
Crossing it changes your price, not your margin
This is the part that costs money. If you sell to VAT-registered businesses, registration is close to neutral for them. They reclaim what you charge. Your effective price is unchanged and you can now reclaim VAT on your own purchases, which is a small gain.
If you sell to the public, nothing of the sort happens. A haircut at £30 is a haircut at £30, because that is what the sign says and that is what the customer will pay. After registration, £5 of every £30 goes to HMRC. Your take on that haircut is £25. You have not lost a customer and you have lost a sixth of your revenue.
You have three options and all three are uncomfortable. Put the price up to £36 and find out how loyal your customers are. Absorb it and accept a materially thinner business. Or split the difference and absorb part of it. Businesses that plan for this in advance tend to move prices in the autumn before they cross, so the increase is a price rise rather than an obvious tax pass-through.
There is a fourth option people take without admitting it, which is to stop growing. Turning down work in December to stay under the threshold is a real behaviour, and the bunching of turnover just below the threshold has been examined repeatedly in official reviews of the tax system. It is rational in the short term and it caps your business permanently.
The flat rate scheme is a bet, not a discount
The VAT Flat Rate Scheme lets a smaller business charge 20% as normal but pay HMRC a fixed percentage of its gross takings instead of accounting for input and output VAT separately. You can join if you expect VAT-taxable turnover of £150,000 or less excluding VAT, and you must leave once total income including VAT exceeds £230,000.
The rate depends on your trade sector. There is also a first-year discount of one percentage point for a newly registered business.
The scheme is simpler, not automatically cheaper. It is a bet that your input VAT will stay low. If you buy a van, fit out premises or start carrying stock, the flat rate can cost you more than standard accounting would have done, because on the flat rate scheme you cannot generally reclaim input VAT except on single capital purchases of £2,000 or more including VAT.
There is also the limited cost trader rule. If your spending on goods is below 2% of turnover, or below £1,000 a year, you pay 16.5% regardless of sector. That rate was introduced to close down consultancy-style businesses using the scheme as a margin. At 16.5% of gross, you are handing over very nearly all the VAT you charged.
Registering early is sometimes the cheaper move
Voluntary registration below the threshold is allowed and is occasionally the right answer. It makes sense if most of your customers are VAT-registered, if you have a lot of input VAT to reclaim, or if you are building towards premises and equipment. It also removes the growth ceiling before you build a business around avoiding it.
It is a poor idea if you sell to consumers and you are nowhere near £90,000, because you are volunteering a 20% cut of your revenue for the privilege of quarterly returns.
Whatever you choose, keep the rolling figure somewhere you look at it. A single column in a spreadsheet, updated monthly, showing the last twelve months of taxable turnover. Under Making Tax Digital for VAT, once registered you must keep digital records and file through compatible software, so you will be in a system that can show you the number anyway. The failure is almost never arithmetic. It is not looking.
If you do cross late, tell HMRC rather than waiting for the letter. Late registration carries a penalty based on the VAT due and how late you were, and an unprompted disclosure is treated more kindly than a prompted one.
Where this shows up in the game
In Business Baron the VAT threshold is not a tooltip, it is an event. You watch the rolling twelve-month figure climb, you decide whether to push for the extra work in November or hold it back to January, and if you cross it without moving your prices you feel the margin go in the next quarter. A career can start in any year from 1930, so the threshold moves under you as it has in reality. It turns up early enough that most players meet it in their first business, whichever business that is.