VAT scope and registration

Finance Act 2025 · 2025/26

1 VAT scope and taxable supplies

In this TX lecture: The consequences of VAT deregistration are not examined in FTX; the registration and deregistration conditions remain examinable.

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2 VAT basics

(a) VAT is charged on the taxable supply of goods and services in the UK by a taxable person in the course of their business.

(b) A taxable person ('trader') can be an individual, a partnership or a company.

Standard rated – 20%
Zero rated – 0%
Exempt

(d) The distinction between capital and revenue expenditure, that applies to most areas of tax, is not generally important for VAT.

(e) Taxable supplies are those that are either standard rated or zero rated. A trader that is registered for VAT must charge output VAT on sales (including the sales of capital assets) but may reclaim input VAT on purchases (including the purchases of capital assets) and expenses.

(f) If a trader only makes exempt supplies he is unable to register for VAT and cannot reclaim input VAT (which then becomes an additional cost to the business).

Supply	Output VAT	Related input VAT
Standard rated	Normally 20%	Normally recoverable for taxable business use
Zero rated	0%, but still taxable	Normally recoverable
Exempt	No output VAT	Related input VAT normally not recoverable

HMRC administers VAT. A registered trader collects output tax, claims eligible input tax, keeps records, files returns and pays/claims the net balance. Use HMRC VAT notices, legislation and current guidance for questions; record the business’s VAT registration number when contacting HMRC.

3 VAT registration

3.1 Compulsory registration – the historic test

A trader making taxable supplies must register for VAT if, during the previous 12 months, the value of taxable supplies exceeded £90,000. However, VAT registration is not required if taxable supplies in the following 12 months will not exceed £88,000. These figures are exclusive of VAT.
HMRC must be notified within 30 days after the end of the period when taxable supplies exceeded £90,000.
The trader will be registered from the end of that 30 day period (i.e. the first day of following month) or an agreed earlier date. For example, if the registration limit was exceeded in the 12 months to the 31 March 2026, the business must notify HMRC by 30 April 2026 and would be registered with effect from 1 May 2026.
Note that the £90,000 threshold is an absolute limit; i.e. if a new trader exceeds the threshold in fewer than 12 months, then VAT registration is required.

Orchid Ltd commenced trading on 1 June 2025. Its sales are as follows:

		£			£
2025	June	3,800	2026	January	7,000
	July	3,900		February	7,500
	August	4,300		March	8,100
	September	5,100		April	8,900
	October	6,000		May	10,200
	November	6,500		June	11,800
	December	7,900		July	14,500
		37,500

The company’s sales are all standard rated.

State:

(a) When Orchid Ltd will become liable to compulsory VAT registration.

(b) The date by which Orchid Ltd must notify HMRC.

(c) The date from which Orchid Ltd will be registered for VAT.

Orchid Ltd will become liable to compulsory VAT registration when its taxable supplies in the previous 12 months exceed £90,000.

The taxable supplies for 1 June 2025 to 31 December 2025 = 7 months are £37,500, so adding on the next 5 months (1 January 2026 - 31 May 2026 gives us £(37,500 + 7,000 + 7,500 + 8,100 + 8,900 + 10,200) = £79,200 for the first 12 months of trading to 31 May 2026 so we now move forward adding in the next month, June 2026 and removing the sales of what is now 13 months ago, June 2025. As this revised 12 month total is £(79,200 + 11,800 - 3,800) = £87,200, compulsory registration is still not required. When we move forward to the end of July 2026, taxable supplies are £(87,200 + 14,500 - 3,900) = £97,800, so the threshold of £90,000 was breached by 31 July 2026.

Orchid Ltd will have to notify HMRC within 30 days of 31 July 2026, so by 30 August 2026.
The company will be registered from 1 September 2026 or from an agreed earlier date.

3.2 Compulsory registration – the future test

A trader must register for VAT if taxable supplies will exceed £90,000 during the following 30 days alone. This is regardless of any taxable supplies preceding this 30 day period. Again the figure is exclusive of VAT.
HMRC must be notified by the end of the 30 day period.
The trader will be registered from the start of the 30 day period.

Tulip Ltd commenced trading on 1 April 2026. The company’s sales are all standard rated, and its forecast taxable supplies are £96,000 per month.

State the date that Tulip Ltd must notify HMRC by and the date from which the company will be registered.

A business must register for VAT if there are reasonable grounds for believing that taxable supplies will exceed £90,000 in the following 30 days alone.

Forecast income is £96,000 per month, and so taxable supplies for the 30 day period to 30 April 2026 will exceed £90,000.

Tulip Ltd will have to notify HMRC within 30 days of 1 April 2026 (i.e. by 30 April 2026) but will be registered from 1 April 2026.

3.3 Voluntary VAT registration

A trader may decide to voluntarily register for VAT where taxable supplies are below the £90,000 registration limit. This will be beneficial when:
- The trader makes zero rated supplies. Any input VAT will be able to be reclaimed, but no VAT will be charged on the zero rated outputs.
- The trader makes supplies to VAT registered customers. Input VAT will be reclaimed, and it should be possible to charge output VAT on top of the pre registration selling price. This is because the output VAT will be recoverable by the customers.

It will probably not be beneficial to voluntarily register for VAT where customers are members of the general public, as such customers cannot recover the output VAT charged. If selling prices cannot be increased, the output VAT will become an additional cost to the business.
Whether or not output VAT can be passed on to customers will also be an important factor when deciding whether to remain below the VAT registration limit, or whether it is beneficial to accept additional work that results in the limit being exceeded.

Vine Ltd has been in business for a number of years. All of its sales are standard rated. The company is not registered for VAT. At present, Vine Ltd’s annual turnover is £85,000.

The company is planning to increase its prices by 10%, however as Vine Ltd operates in a competitive market and all of its sales are to the general public, there is no scope for any further price increases. Vine Ltd’s standard rated expenses are £4,800 p.a. (inclusive of VAT).

Determine whether it is beneficial for Vine Ltd to put up its prices.

Prior to putting up its prices, Vine Ltd’s net profit is £80,200 (£85,000 - £4,800).

If Vine Ltd puts up its prices by 10%, then its turnover will be £85,000 x 110% = £93,500 p.a., which will exceed the VAT registration limit of £90,000, and the business will have to register for VAT.

Output VAT will have to be absorbed by Vine Ltd, as sales are to the general public and there is no further scope for price increases.

The revised annual net profit will be:

	£
Income (£93,500 × 100/120)	77,917
Expenses (£4,800 × 100/120)	(4,000)
Net profit	73,917

This is a decrease in net profit of £6,283 (£80,200 – £73,917), and so it is not beneficial for Vine Ltd to put up its prices.

Exception from historic registration must be requested from HMRC with evidence that taxable turnover in the next 12 months will not exceed £88,000; it is not simply automatic. A business making only zero-rated supplies may apply for exemption from registration, but then cannot recover input tax as a registered trader.

Rani’s cumulative taxable turnover first exceeds £90,000 in the 12 months to 31 August 2025. Give notification and registration dates.

Notify HMRC by 30 September 2025. Registration ordinarily takes effect 1 October 2025. Exempt turnover is not counted; zero-rated turnover is counted. The turnover test is rolling, not only the financial year.

On 10 November 2025 Sana expects taxable supplies of £100,000 in the next 30 days alone. Give the effective date and notification rule.

Effective registration is 10 November 2025, the start of that 30-day period. Notify by the end of the 30 days. Do not wait for a rolling 12-month test.

4 Deregistration

4.1 VAT deregistration

A trader stops being liable to VAT registration when it ceases to make taxable supplies. The trader must notify HMRC within 30 days, and will then be deregistered from the date of cessation or from an agreed later date.
A trader can also request voluntary VAT deregistration if expected taxable supplies in next 12 months are less than £88,000.

Iris Ltd has been registered for VAT since 1990, and its sales are all standard rated. The company has recently seen a downturn in its business activities, and sales for the years ended 30 June 2026 and 2027 are forecast to be £60,000 and £49,500 respectively.

Iris Ltd can request that HMRC cancel its VAT registration because its taxable supplies during the following 12 month period are not expected to exceed £88,000.
This is provided the fall in the value of taxable supplies is not due to the temporary or permanent cessation of taxable supplies.
The company’s VAT registration will be cancelled from the date on which the request is made or from an agreed later date.