Getting VAT Ready
Crossing the £90,000 VAT threshold is a major growth milestone, but it is also a big change for your business with implications for profit, cash flow and admin. In this blog we give small business owners the heads up with what to think about.
GEtting the start date in focus
Missing the deadline by which your business should be registered can be a big headache. HMRC will require back-dated VAT and there may be penalties so it is well worth getting the deadline in focus.
Track the Rolling 12-Month Window
Continuous Monitoring: The mandatory threshold is not based on your fixed accounting year. At the end of every month, calculate your total turnover for the previous 12 months.
The 30-Day Rule: If you sign a major contract expecting turnover to cross £90,000 within the next 30 days alone, you must register immediately.
Taxable vs. Exempt: Zero-rated sales (e.g., standard books, basic food) count toward the threshold, but exempt sales (e.g., financial or healthcare services) do not.
Once you have met the criteria for registering you must do so by the end date of the next month and the registration date will be the first day of the month following.
Plan Your Pricing
Arguably this step should be done even before you start trading. Many businesses have been established at a price point that makes profit whilst they are not VAT registered but means they are not once VAT registered.
The effect of VAT on your price will turn on what kind of clients your business has.
B2B Advantage: If your primary clients are VAT-registered businesses, adding 20% VAT generally won't impact them because they can reclaim it.
B2C Squeeze: General consumers cannot reclaim VAT. You need to decide whether to absorb the tax within existing prices—reducing your net margin—or raise prices by 20% and risk losing cost-conscious buyers.
Prepare Systems
Making Tax Digital (MTD) requires all VAT-registered entities to keep digital records and file returns using compatible software (e.g. Xero).
You will need to reconfigure the software so that to record VAT and link it to HMRC MTD Portal so that your VAT returns can be submitted via MTD.
We should also think about record keeping. The most common inspection from HMRC is a VAT inspection. In an inspection HMRC will ask to see VAT records. So it is important to understand what a valid VAT record is (see: https://co-accounting.co.uk/qanda/valid-vat-record?)
Prepare to Reclaim Past Expenses
You can reclaim VAT paid before the date of VAT registration on:
Physical stock and assets bought by the business up to 4 years prior to registration (if they are still in your possession)
Services purchased up to 6 months prior.
As with all VAT being reclaimed we may need to prove that we paid the VAT so we need a valid VAT record. In fact this is especially important because HMRC quite frequently look into these claims.
