Does a Limited Company Have to Be VAT Registered?

The term Value Added Tax (tax) refers to a consumption tax imposed on goods and services in the UK. 

It can be charged at different rates such as standard, reduced and zero-rated rates.  Businesses that meet certain criteria must register themselves for VAT, charge it on sales and also submit regular returns to HMRC. 

Such businesses can reclaim VAT paid on their business expenses.

A limited company, however, is not automatically required to register for VAT. For such companies, VAT only becomes mandatory if they are meeting certain conditions, which are primarily based on turnover.

This guide will explain when VAT registration becomes compulsory, beneficial and also unnecessary for your limited company. It will help you better understand and make the right decision to make your business more profitable.

When Is VAT Registration Mandatory for Limited Companies

If the taxable turnover of your company is exceeding £90,000 in any 12 month rolling period, your limited company will be required to register for VAT.

This criteria applies to all limited companies whether you sell goods or services.

What is the UK VAT rate?

There are 3 UK VAT rates, each depending on the type of goods and services being sold by your limited company. The table below explains what exactly is included in these rates.

Rate	Charge	Applied to
Standard	20%	Most goods and services
Reduced	5%	Some goods and services such as home energy, children’s car seats, residential property conversions, etc.
Zero	0%	Most foods and children’s clothing

What Counts as Taxable Turnover?

VAT taxable turnover refers to the total income your business generates from selling goods and services that are not VAT exempt. More importantly, taxable turnover is based on when you issue invoices or receive payments for your business. 

Here’s what this includes and excludes:

• Standard-rated (20%), reduced-rated (5%), and zero-rated (0%) sales – All three of these count towards your threshold. This covers most goods and services your business might sell.
• Exempt supplies – some services such as insurance, education and financial services do not count towards the £90,000 threshold.
• Sales outside the UK – These may or may not be included depending on the specific VAT regulations for international transactions.

Key Requirements

• 30-day deadline: You must register your limited company within 30 days of exceeding the threshold.
• Backdated VAT due: If you register late, HMRC can demand VAT on sales made after the threshold was crossed.
• Penalties are applied: for late registration, including fines and interest charges.

Pro tip: Try to monitor your rolling 12-month turnover regularly, not just at the year-end. This helps to avoid unexpected VAT liabilities. 

What is the VAT Registration Threshold for 2025?

For the 2024-2025 tax year, the VAT registration threshold remains at £90,000 of your businesses taxable turnover. 

This means that your limited company must register for VAT if your taxable sales exceed this amount in any 12-month rolling period. 

This VAT threshold has been at this number since 1 April 2024, before that, it was £85,000. It will remain unchanged till April 2026.

It is important to note that this £90,000 limit only applies to your total VAT-taxable sales and not on your profits. Even if your business isn’t profitable at any stage, you still need to register if you cross this turnover threshold.

Voluntary VAT Registration: When It Makes Sense

Even if your limited company’s turnover is below the £90,000 threshold, making Voluntary VAT registration can be considered a financially smart move for your limited company. 

These are some situations in which you can consider making voluntary registration:

1. Reclaiming VAT on Business Expenses

• If your company has significant startup costs, equipment purchases, or other VAT-charged expenses, voluntary registration lets you reclaim this VAT.
• This is particularly valuable for businesses with high initial outlays (e.g., construction and manufacturing)

2. Working with VAT-Registered Clients

Many larger limited companies prefer working with VAT-registered suppliers. Making a voluntary registration helps such businesses avoid appearing ‘small’ or losing contracts to their VAT-registered competitors.

3. Boost Professional Credibility

For certain B2B businesses, being VAT-registered can enhance your company’s reputation and make your business.

How does Voluntary Registration Work?

Voluntary VAT registration follows the same process as mandatory registration, but it is initiated by your limited company before reaching the £90,000 threshold. Some key steps involved in voluntary registration are as followed:

Application Process: Submit your registration through HMRC’s online portal. Once done you will receive a VAT number and effective registration date.

Ongoing Requirements:

• You need to charge VAT on all applicable sales (standard 20% rate unless exceptions apply).
• It is also important to file quarterly VAT returns (usually due one month and seven days after the period ends).
• You must also maintain detailed records of all VAT transactions for at least 6 years.

Financial Considerations:

You can reclaim VAT on business purchases made up to 4 years before registration if you have receipts. You can deregister later if turnover stays below £83,000 (deregistration threshold).

Pro Tip: Many voluntarily registered businesses use the Flat Rate Scheme (if eligible) to simplify accounting while often maintaining a positive VAT position.

When is VAT Registration Not Needed?

There are many scenarios in which your limited company does not need to register for VAT. Three of the major ones being:

• Your taxable turnover remains below £90,000
• There are no significant VAT reclaims possible
• Your clients are mainly consumers (B2C) who prefer VAT-free prices

There are some important considerations to make if you are not required to be VAT registered:

• Monitoring your turnover: The £90k threshold applies to any 12 month period, so it is crucial that you keep monitoring if it crosses the applied limit.
• Exempt supplies don’t count: Services like insurance and education won’t push you over the limit
• Voluntary registration remains an option: if the circumstances change for your limited company

Important: Accidentally exceeding the threshold triggers a 30-day registration deadline – late penalties can apply even for honest mistakes, hence regular monitoring is crucial to avoid any penalties. 

What Happens If You Don’t Register on Time?

If your limited company is exceeding the £90k threshold and you are not VAT registered or have failed to register on time, HMRC may impose the following penalties on you:

• Financial Penalties: this is based on how much VAT you should have paid when registered
• Backdated VAT Bills: You will owe VAT on all taxable sales that were made after the threshold was crossed
• Interest Charges: This is applied to late payments (currently 7.75%)

Important: It is extremely crucial to maintain accurate and up-to-date financial records of all your sales and expenses to:

• Spot when you have approached the threshold
• Prove your compliance timeline if questioned by HMRC
• Minimise potential penalties through voluntary disclosure to HMRC

Pro Tip: Set up turnover alerts in your accounting software to avoid accidental breaches.

Read More on VAT Penalties and Deadlines

VAT Schemes to Simplify Your Reporting

For small businesses who are looking to simplify their VAT reporting after registration, HMRC offers several schemes that help in reducing administrative work. The most widely used one is the Flat Rate Scheme (FRS).

This allows eligible businesses (having turnover below £150,000) to pay VAT as a fixed percentage of their gross sales, rather than tracking their individual input and output VAT amounts. This approach helps businesses cut down on paperwork while also providing financial benefits. 

This scheme uses industry-specific rates (ranging from 4% to 14.5%) that account for typical expense patterns in different sectors, potentially offering savings while maintaining compliance. 

If you have a small business, you can easily apply for FRS through HMRC online account and begin using the scheme for your next VAT quarter. This scheme is best if your business has minimal VAT-claimable expenses such as consultants, freelancers and IT service providers.

Making the Right VAT Decisions for Your Business

VAT registration isn’t automatic for limited companies but only becomes mandatory once your taxable turnover exceeds the £90k threshold. 

While voluntary registration can benefit some businesses, many of them prefer to remain unregistered if they operate below the threshold. 

Special schemes like the Flat Rate VAT option can simplify compliance for eligible small businesses

Since every company’s situation differs – from cash flow considerations to client expectations – we strongly recommend getting personalised VAT advice tailored to your specific circumstances.