VAT Threshold 2025/26 UK: The £90,000 Rule, the Rolling Test and What Happens Next

The VAT threshold for 2025/26 is £90,000 of taxable turnover in any rolling 12-month period, raised from £85,000 on 1 April 2024 under VATA 1994 Schedule 1 as amended by SI 2024/307 (The Value Added Tax (Increase of Registration Limits) Order 2024). Cross it and you must notify HMRC within 30 days of the end of the month in which you went over. Your effective date of registration is then the first day of the second month after you exceeded the threshold, meaning you must charge VAT on invoices from that date even if your certificate has not yet arrived.

That date distinction matters far more than most business owners realise. A contractor who crosses £90,000 on 18 July has until 30 August to notify HMRC, and their registration becomes effective from 1 September. Every invoice raised from 1 September must carry VAT at the standard rate of 20% (or the applicable reduced or zero rate). If they raise invoices in September without VAT, they will owe the 20% to HMRC out of their own margin.

This guide covers the rolling test in full with a worked numeric example, explains exactly what taxable turnover includes and excludes, sets out the penalty regime for late registration, compares the flat rate scheme against standard accounting, and addresses the deregistration threshold and voluntary registration logic. Every figure is drawn from the locked positions in the Holloway Davies ground-truth document (§7) and verified at GOV.UK.

VAT Rates in the UK 2025: Standard, Reduced and Zero

Before running the threshold calculation, it is worth being precise about which supplies count. VAT in the UK in 2025 operates at three rates under VATA 1994:

Rate	Percentage	Common examples	Counts toward £90,000 threshold?
Standard rate	20%	Most goods and services (consultancy, construction, software, most retail)	Yes
Reduced rate	5%	Domestic fuel and power, children's car seats, home energy products	Yes
Zero rate	0%	Most food, books, newspapers, children's clothing and footwear, new residential construction	Yes
Exempt	N/A	Insurance, most education, health services, certain property transactions	No

The critical row is zero-rated. A food retailer selling exclusively zero-rated goods still counts that turnover toward the £90,000 threshold, even though they charge no VAT on individual invoices. Once over £90,000, voluntary registration to reclaim input VAT on purchases can be highly advantageous for zero-rated suppliers. We cover this specific scenario in detail on the page when to register for VAT if you sell zero-rated goods.

What Exactly Counts as Taxable Turnover?

Taxable turnover is the gross value of all your standard-rated, reduced-rated and zero-rated supplies before deducting expenses. It is not net profit, and it is not what you bank after costs. For a limited company director running a consultancy, it is the total invoiced to clients. For a sole trader builder in Bristol, it is the full contract price including materials, before subtracting labour costs or overheads.

The following do not count:

• Exempt supplies (insurance, most education, health services, certain lease and property transactions)
• One-off capital asset disposals (selling a company vehicle, a piece of machinery or an item of computer equipment you have used in the business)
• Dividends, interest and other investment income
• Wages paid by an employer acting as an intermediary

A common trap: a sole trader who provides both exempt financial-advice services and standard-rated bookkeeping counts only the bookkeeping revenue toward the threshold. The financial-advice revenue is outside the calculation entirely. Partial exemption applies once registered, but it does not affect whether you need to register.

A second trap: selling a business asset does not count toward the threshold, but selling goods as part of your trade does. A joiner who sells a secondhand van once counts the van sale as a capital disposal (excluded). A joiner who regularly buys and sells timber has trading supplies (included).

The Rolling 12-Month VAT Test: A Full Worked Example

HMRC does not look at your accounting year. It looks at any consecutive 12-month window. At the end of every calendar month, you add the current month's taxable turnover to the previous 11 months and check whether the total exceeds £90,000.

Here is a full walkthrough. A freelance web developer in Leeds has the following monthly taxable turnover (all at the standard 20% rate, not yet VAT-registered):

Month	Monthly turnover	Rolling 12-month total	Threshold exceeded?
May 2025 to April 2026	£6,500/month (average)	£78,000 at end of April 2026	No
May 2026	£8,000	£79,500 (dropping May 2025's £6,500, adding £8,000)	No
June 2026	£14,000 (large platform build)	£87,000 (dropping June 2025's £6,500, adding £14,000)	No
July 2026	£10,000	£90,500 (dropping July 2025's £6,500, adding £10,000)	Yes, exceeded by £500

At the end of July 2026, the rolling 12-month total is £90,500. That is £500 over the threshold. The developer must now:

• Notify HMRC by 30 August 2026 (30 days from the end of the month in which they exceeded the threshold)
• The effective date of registration is 1 September 2026 (the first day of the second month after July)
• All invoices raised on or after 1 September 2026 must include VAT at the applicable rate

The total VAT liability from 1 September will depend on the rate applicable to each supply. On a September turnover of £10,000, the developer must account for £2,000 in output VAT (10,000 x 20%). That £2,000 belongs to HMRC, not to the developer's business. If they invoice £10,000 plus VAT and their client pays £12,000 in total, the developer retains £10,000 and remits £2,000 to HMRC. If they invoice £10,000 flat (without VAT) because they forgot to add it, they still owe HMRC £2,000. The £2,000 comes out of the developer's margin.

This is why the effective date precision matters. Missing a month means undercharging clients, because you cannot retrospectively ask a client to pay additional VAT unless your contract explicitly reserves that right.

The Forward-Looking Test: If You Expect to Exceed £90,000 in the Next 30 Days

There is a second trigger most business owners overlook. If at any point you expect your taxable turnover to exceed £90,000 in the next 30 days alone (not the full rolling 12 months), you must register immediately. Under GOV.UK guidance, your effective date of registration is the date you realised your turnover would exceed the threshold, not the date it actually does.

Practically: a freelance consultant who signs a single £95,000 project on 1 March that will all be invoiced within 30 days must register from 1 March, even though their historic rolling 12-month total was below £90,000. They have 30 days from 1 March to complete the registration. Every invoice on that project carries VAT.

This is a sharper trigger than the historic test, and it catches businesses with lumpy or project-based revenue. A seasonal events business, a software firm landing a large enterprise deal, or a construction contractor winning a sizeable contract can all trip the forward-looking test even with modest prior-year turnover. The page on when a seasonal business must register for VAT covers this scenario in more detail.

What Happens If You Miss the VAT Threshold Deadline?

Late registration is one of the more unpleasant VAT outcomes because the liability is retrospective and inescapable. If you should have registered and did not, HMRC will:

• Backdate your registration to the effective date (the first day of the second month after you exceeded the threshold)
• Assess you for all output VAT you should have charged from that date
• Charge interest on unpaid VAT from the effective registration date
• Apply a late-notification penalty

The penalty is calculated under Finance Act 2008 Schedule 41 as a percentage of the potential lost revenue (the VAT that should have been paid). Unlike the old repealed time-based regime, the current penalty is behaviour-based. For a domestic VAT failure to notify (Category 1), the rates are: non-deliberate 30%, deliberate but not concealed 70%, deliberate and concealed 100% of the potential lost revenue. HMRC can reduce penalties where the taxpayer discloses unprompted, but these are the headline rates before any reduction. (Note: Finance Act 2015 Schedule 20 contains word substitutions to paragraphs 6, 6A and 13(3) of Schedule 41 that are listed on legislation.gov.uk as not yet brought into force. Those amendments affect descriptive language only and do not alter the 30%, 70% or 100% Category 1 rates set out above.)

On top of the penalty, you owe the underlying VAT itself. If you invoiced clients without VAT during the period you should have been registered, that VAT is still due to HMRC, and you cannot force clients to pay it retrospectively unless your terms of business include a VAT clause. The practical result is that the VAT comes entirely out of your revenue.

A manufacturing business in Birmingham that turned over £110,000 in a year without registering would owe output VAT on sales to non-VAT-registered customers (typically 20% of the net supply value), plus a behaviour-based penalty on that figure, plus interest. On a £20,000 post-threshold VAT liability where the failure was non-deliberate, the penalty could be £6,000 (30%) before any disclosure reduction. For deliberate concealment, that rises to £20,000 (100%). For businesses with higher margins on VATable supplies, the numbers scale significantly.

Can You Deliberately Stay Under the £90,000 Threshold?

You can turn down work, defer invoicing or otherwise manage your revenue to stay below the threshold. This is legal, provided you are not artificially splitting a single business between related persons or contriving transactions with no genuine commercial purpose other than to avoid VAT registration.

HMRC has anti-fragmentation powers. If two related businesses provide services to the same customers using the same premises, staff and equipment, HMRC can treat them as a single business for VAT purposes and assess a combined threshold breach. The key question is substance: do the separate entities have genuinely independent commercial operations, or is the split a device?

Separately, if you consistently hover at £80,000 to £89,000 and turn away work to stay under, you are making a real commercial sacrifice. The question to model is what voluntary registration would actually cost you. If most of your customers are businesses that can reclaim VAT, registering voluntarily changes your cash flow and admin but has limited net cost. If your customers are mostly consumers who cannot reclaim VAT, charging 20% VAT makes your prices less competitive unless you absorb it.

Voluntary Registration: When the Numbers Work in Your Favour

Voluntary VAT registration below £90,000 is available to any business making taxable supplies (VATA 1994 Sch 1 para 9). It makes sense in three distinct situations:

Your customers are mostly VAT-registered businesses. A management consultant with £70,000 in annual turnover working exclusively with VAT-registered corporate clients charges VAT at 20%. The clients reclaim it in full, so it costs them nothing. The consultant meanwhile reclaims VAT on their own costs: a new laptop (20%), software subscriptions (20%), professional development, travel. On £15,000 of VAT-inclusive annual costs, that is £2,500 in input VAT reclaimed per year.

You have significant VATable costs on a zero-rated or low-rate supply. A baker selling zero-rated bread can only reclaim VAT on flour, ovens, packaging and energy if they are VAT-registered. With no registration, those input costs carry an embedded VAT cost. With registration, the input VAT is recoverable and the zero-rated sales do not create an output VAT liability. This is often the decisive argument for food producers and publishers.

You expect to exceed the threshold within the next 12 months and want a clean start. Registering early avoids the forward-looking test trap and gives you time to update invoicing software, notify customers and choose your accounting scheme deliberately rather than under time pressure.

Voluntary registration is not automatic in its benefit. If your customers are mainly consumers (B2C), adding 20% VAT to your prices either erodes your margin or makes you more expensive. Run the numbers for your specific customer mix before deciding. The page on when to get VAT registration help for your UK business covers the decision criteria in more depth.

The VAT Flat Rate Scheme: Who Benefits and Who Does Not

Once VAT-registered, you can apply for the flat rate scheme (FRS) if your expected taxable turnover is £150,000 or less (excluding VAT). Under the FRS, instead of tracking input and output VAT on every transaction, you pay a fixed percentage of your VAT-inclusive gross turnover to HMRC. The specific percentage depends on your business sector.

The critical exception is the limited cost business category. If your goods costs are less than 2% of your VAT-inclusive turnover, or less than £1,000 per year, you are a limited cost trader regardless of sector. Your flat rate is then 16.5%, which is very close to the effective output rate under standard accounting for a VAT-free-margin business. For most service businesses, including consultants, software developers, freelancers and contractors, the FRS at 16.5% typically produces a worse outcome than standard VAT accounting, which allows full input VAT recovery on genuine business costs.

There is one exception worth noting: in the first year of VAT registration (not the first year of trading), a 1% discount applies to whatever flat rate percentage you use. A limited cost trader would pay 15.5% in year one rather than 16.5%. For a business with limited costs this still usually loses against standard accounting, but the first-year discount shifts the calculation slightly.

Business type	Typical flat rate %	Year-1 rate (with 1% discount)	Better than standard VAT?
IT consultant / software developer	14.5% sector rate; 16.5% if limited cost business (goods under 2% of turnover or under £1,000/yr)	13.5% / 15.5%	Usually no (most IT consultants qualify as limited cost businesses, making the 16.5% rate apply)
Accountant / bookkeeper	14.5% sector rate; 16.5% if limited cost business (goods under 2% of turnover or under £1,000/yr)	13.5% / 15.5%	Usually no (most accountants qualify as limited cost businesses, making the 16.5% rate apply)
General building or construction	9.5%	8.5%	Depends on materials spend (high materials = standard better)
Catering / restaurant	12.5%	11.5%	Often yes for low-margin takeaway; model carefully for table service
Retail (general goods)	7.5%	6.5%	Often yes for low-input-VAT retailers

For a detailed comparison of the flat rate scheme against standard accounting, including worked examples at different margin levels, see the page on flat rate VAT vs standard VAT.

The Cash Accounting Scheme: A Practical Alternative

Under standard VAT accounting, output VAT is due when you invoice (the tax point), whether or not your client has paid. For a business with 60-day payment terms, this creates a cash flow gap: you owe HMRC VAT on an invoice you issued two months ago but have not been paid for yet.

The cash accounting scheme resolves this by basing VAT on payments actually received and made, rather than invoice dates. You account for output VAT when the client pays you, and you recover input VAT when you pay your supplier. The scheme also provides automatic bad-debt relief: if a client never pays, you never owe the output VAT.

You can join the cash accounting scheme if your estimated taxable turnover is £1.35 million or less. You must leave when taxable turnover exceeds £1.6 million. For most businesses registering at the £90,000 threshold, cash accounting is a straightforward improvement on the standard accruals basis if credit terms are a feature of their trade.

The Deregistration Threshold: £88,000

If your taxable turnover falls below £88,000 and you can satisfy HMRC that it will stay below that level, you can apply to cancel your VAT registration. The deregistration threshold is intentionally set below the registration threshold (by £2,000) to prevent businesses from repeatedly registering and deregistering around the same turnover level.

Deregistration is not always the right call. On deregistration, you must account for VAT on all stock and business assets you hold at the cancellation date, valued at their current market value. This is often called a VAT clawback or deemed supply. A retailer holding £30,000 of stock at cost (bought at 20% VAT) would face a deemed supply VAT calculation on the market value of those goods. The clawback can exceed the administrative saving from deregistration, particularly for asset-heavy businesses.

Once deregistered, you lose the right to reclaim input VAT on future purchases. If your turnover then rises again above £90,000, you must go through the full registration process again, including re-configuring your invoicing software and notifying clients. For most businesses with turnover in the £80,000 to £100,000 range, staying registered is the more practical position.

Making Tax Digital for VAT: Non-Negotiable from Day One

Making Tax Digital (MTD) for VAT has applied to all VAT-registered businesses since April 2022, with no minimum turnover floor. If you register for VAT in 2025/26 for the first time, you must keep digital VAT records and submit returns through MTD-compatible software from the effective date of registration. There is no paper return option.

MTD-compatible software includes Xero, FreeAgent, QuickBooks, Sage and several others. You cannot submit via HMRC's own online portal for VAT (that was closed to new submissions when MTD became mandatory). Spreadsheets are permitted only if you use approved bridging software that connects your spreadsheet to HMRC's API.

The practical implication: before your effective registration date, set up your MTD-compatible software, configure your chart of accounts, and test a dummy VAT return. Trying to retrofit software to 12 months of historical invoices after registration is significantly more difficult than starting clean.

For a checklist of what to set up before your VAT registration goes live, the page on Making Tax Digital for income tax: the accountant checklist covers the broader MTD digital-records obligations in detail, including the overlap between MTD for VAT and the incoming MTD for Income Tax obligations from April 2026.

How to Register for VAT: Process and Timelines

Registration is completed online through Government Gateway. The form asks for your business details, estimated turnover, bank account information, the date you exceeded the threshold (or the date you expect to), and your chosen VAT accounting scheme. You must also select whether you want to join the flat rate scheme, the cash accounting scheme or the annual accounting scheme at the time of registration (or you can apply to join a scheme later).

HMRC's standard processing time is 2 to 4 weeks. Your VAT registration certificate (VAT4) confirms your VAT number and effective date. Until you receive it, you must still charge VAT on eligible invoices from the effective date; you can include a note on invoices saying "VAT registration applied for, VAT number to follow" and issue a VAT invoice once the number is confirmed. If you delay raising VAT invoices until the certificate arrives, you risk undercharging or creating a cash flow problem if clients have already paid without VAT.

For urgent situations where you have already missed the threshold, HMRC can expedite processing if you explain the circumstances. Call HMRC's VAT registration helpline for this. The faster the registration, the smaller the window of non-compliant invoices.

Keeping Track: A Monthly Monitoring Discipline

The rolling 12-month test has no automatic reminder from HMRC. There is no notification that you are approaching £90,000. The obligation falls entirely on the business owner (or their accountant) to monitor the running total.

A practical approach: at the end of each calendar month, pull your total sales figure for the month (gross, before expenses) from your accounting software, add it to your running 12-month cumulative, and subtract the figure from 13 months ago. If the result exceeds £90,000, you have 30 days to notify HMRC. If it exceeds £80,000, you are in early-warning territory and should review whether the next one or two months could push you over.

For businesses with erratic revenue (project contractors, seasonal trade, event-based income), this discipline is especially important. A single large contract can push a business over the threshold in a single month even with otherwise modest turnover. The page on the VAT flat rate scheme explained addresses how to choose an accounting scheme once you are registered, which is the question most business owners face immediately after the threshold conversation.