VAT registration is compulsory if your turnover exceeds £85,000p.a.

Some businesses register for VAT voluntarily, and well before they breach the compulsory registration threshold, but only because it can be advantageous to do so in circumstances where a business's customers are VAT registered and can therefore reclaim the VAT they are charged. 

If your customers aren't VAT registered, your business will have to bear the VAT cost, and accounting for 20% of your turnover to HMRC will reduce your profits significantly.  

In these cases, you should plan to avoid compulsory registration.


Example 1

Donald and Dorothy have a water sports business on Lake Coniston. It achieves a consistent turnover of £75,000p.a.

A year or 2 later it turns out that Donald can run the water sports business on his own, so they decide it’s time to diversify and add guided tours to their business offering, with Dorothy looking after the tour side of the business. Before long tour guide sales are £60,000 p.a, so aggregate turnover of the 2 businesses is now £135,000, and VAT registration has become compulsory.

They now have to account to HMRC for VAT output tax of £22,500p.a and total input tax reclaimable is only £2,500, so their profits are reduced by £20k p.a, just because they are VAT registered.


Example 2

Tony is a sole trader plumber in Ambleside and turns over £60,000 p.a on a labour only basis. He is aware that he would have to charge VAT on his services if his turnover exceeds £85,000 p.a, so he has avoided supplying materials (which he could make a small profit on) in order to avoid VAT registration.

He inherits some cash and uses it to buys 2 small Furnished Holiday Lets (FHLs) which each generate £15,000 in rental income. What he doesn’t realise is that income from FHLs is subject to VAT, and that as a result he has exceeded the VAT threshold.

Some time later he is the subject of an investigation by HMRC who inform him that he should have been VAT registered 3 years ago, and that he now owes them £45,000 in VAT (+ surcharges & penalties).


Both of the scenarios in the examples above could easily have been avoided. 

To avoid falling into similar traps Contact me, David Sutton, and get professional advice.