Understanding UK VAT: Compulsory Registration and Deregistration

May 21, 2025 9 min read
Understanding UK VAT Compulsory Registration and Deregistration

Value Added Tax (VAT) is an indirect tax that is charged throughout the supply chain, from production to the final sale. Unlike direct taxes, which are imposed directly on an individual’s income or assets, VAT is collected by businesses from its customers and paid on to the government.

All businesses making taxable supplies must understand their VAT obligation, beginning with VAT registration and later about deregistration as well. HMRC sets specific thresholds and rules that determine when VAT registration becomes compulsory and when a business must or may deregister.

This article focuses exclusively on compulsory VAT registration and both compulsory and voluntary VAT deregistration, in accordance with HMRC regulations.

Compulsory VAT Registration

Businesses are legally required to register for VAT when their taxable turnover exceeds the threshold set by HMRC, or if they expect it to exceed that level in the near future. This ensures that they charge VAT on their sales and submit returns to HMRC. As of April 2024, the VAT registration threshold stands at £90,000.

To determine whether a business needs to register for VAT, HMRC applies specific tests based on past or expected turnover, as well as the location and nature of the business. These include:

Historic Turnover Test (Rolling 12 Months)

A business must register for VAT if its VAT-taxable turnover exceeds £90,000 in any rolling 12-month period. This is not based on calendar or accounting years; it is assessed on a month-by-month basis.

Key Points

  1. Businesses must monitor turnover at the end of each month by reviewing the last 12 months.
  2. If the threshold is exceeded, the business must register within 30 days of the end of that month.
  3. The effective date of registration will be the first day of the second month after the threshold was exceeded.

Example

If, on 31 August, a business determines that its VAT-taxable turnover for the previous 12 months has reached £92,000, it is required to notify HMRC by 30 September. The effective date of VAT registration will be 1 October.

Future Turnover Test

In certain circumstances, a business may reasonably anticipate that its taxable turnover will exceed the £90,000 threshold within the next 30 days. In such cases, the business is obligated to register for VAT immediately, as soon as it becomes aware that the threshold will be exceeded.

Key Points

  1. This requirement applies when a business either receives a large order, enters a contract, or expects sales to exceed the threshold in the next 30 days.
  2. The business must complete the registration process no later than the end of the 30-day period.
  3. The effective date of registration is the actual date of realization, not the end of the 30-day period.

Example

For instance, on 1 January, a business receives a purchase order valued at £120,000, to be delivered by 30 January. The business must complete the registration process by the end of the 30-day period, i.e., by 30 January. And the effective date of VAT registration will be 1 January.

Note:

If you have made £76,000 in the 11 months to 30 September and expect £20,000 in October, the future test does not apply—because you are not expecting to exceed £90,000 in the next 30 days alone.

However, by the end of October, your total 12-month sales hit £96,000. That triggers the historic test. You must notify HMRC by 30 November, and your VAT registration will start from 1 December—with no VAT charged in November.

Key point: The future test only looks at expected sales in the next 30 days—not cumulative totals.

Non-UK Established Taxable Persons

Non-UK Established Taxable Persons (NETPs) are businesses that are based outside the UK but make taxable supplies within the UK. These businesses must register for VAT as soon as they begin making taxable sales in the UK, without any turnover threshold.

Key Points

  1. NETPs must register from the moment they begin making taxable supplies in the UK.
  2. There is no threshold exemption; VAT registration is required from the first sale.

Online Marketplace and Import Rules

Following Brexit, overseas sellers using online marketplaces (OMPs) may have to register for VAT in the UK, especially if goods are delivered from outside the UK or stored in the UK.

Key Points

  1. VAT obligations may arise based on where the goods are located and who is responsible for the sale.
  2. These rules particularly affect sellers using platforms like Amazon and eBay.

Voluntary VAT Registration

Voluntary VAT registration enables a business to register for VAT even when its taxable turnover is below the current VAT registration threshold set by HMRC. This can be beneficial in certain situations, such as when a business wishes to reclaim input VAT on its purchases or enhance its credibility with customers and suppliers.

In addition, voluntary registration is also available to intending traders—businesses that have not yet begun trading but can demonstrate a clear intention to do so in the near future. This allows them to prepare in advance and potentially recover VAT on pre-trading expenses.

VAT Registration Process

The process of registering for VAT in the UK is primarily done online due to its convenience and efficiency. Here’s a step-by-step breakdown:

Step 1: Create a Government Gateway Account

To begin, businesses need to create a Government Gateway Account. This involves setting up a unique ID and password, which provides secure access to HMRC’s online services.

Step 2: Provide Business Information

During registration, the following details are required:

  • Business name and address
  • Type of business (e.g., sole trader, partnership, or limited company)
  • Turnover and expected VAT taxable revenue
  • Bank account details
  • Contact information for the business owner or director

Step 3: Submit the Application

Once all the necessary details are filled in, submit the application through the HMRC website. HMRC will review the application and verify the provided information.

Step 4: Receive an Activation Code

Within a few days, HMRC will send an activation code by post to the business address. This code is essential for accessing the VAT online dashboard.

Step 5: Access the VAT Dashboard

After activating the account, businesses can access the VAT dashboard. From here, they can:

  • Check their VAT registration status
  • Submit VAT returns
  • Track VAT payments and refunds
  • Monitor important deadlines
  • Apply for or download the VAT registration certificate

Step 6: Receive VAT Registration Number

Upon successful registration, HMRC will issue a unique VAT registration number. This number must be included on invoices and official business documents when charging VAT to customers.

Penalties for Late Registration

Failing to register for VAT on time can lead to significant financial penalties imposed by HMRC. The penalty charged is a percentage of the potential lost revenue. The potential lost revenue for VAT is the amount of VAT due from date registration should have occurred to date HMRC notified. The VAT registration is backdated to when it should have taken place and the VAT arising in the period until actual registration must be paid over to HMRC.

The percentage depends on:

  • the type of behavior resulting in the penalty; and
  • the type and quality of disclosure

* From the date of the tax becoming unpaid

Reasonable Excuse and Mitigation

HMRC may waive or reduce the penalty if the business has a reasonable excuse for the late registration. Examples of reasonable excuses include serious illness, bereavement, or unforeseen circumstances that prevented timely registration. However, lack of funds or ignorance of the law are not considered valid reasons.

Appeals

If a business believes the penalty is unjustified or incorrect, it has the right to appeal within 30 days of the date of the letter which HMRC has sent for notifying about penalty. HMRC provides information on how to appeal in the penalty notification.

Compulsory VAT Deregistration

In certain situations, a business is required to cancel its VAT registration because it no longer meets the conditions for being registered. This is known as compulsory deregistration, and it ensures that only businesses making taxable supplies above the relevant threshold remain within the VAT system.

When Deregistration is required:

  • The business ceases trading or no longer makes taxable supplies.
  • The business switches to making only exempt supplies.
  • The business is sold or legally transferred to a new owner.
  • The business becomes a member of a VAT group and will no longer submit its own VAT returns.
  • The business is no longer established in the UK and has no taxable supplies here.

Note

To cancel VAT registration, the business must inform HMRC within 30 days of becoming ineligible.

Voluntary VAT Deregistration

A business that is currently VAT-registered may apply to deregister voluntarily if it no longer needs to be registered. This option is available when the business’s VAT-taxable turnover falls below the deregistration threshold and is expected to remain below that level going forward. Voluntary deregistration can help reduce administrative burdens, particularly for small businesses with limited taxable activity.

Conditions for Voluntary Deregistration

  • The business’s taxable turnover over the past 12 months is below the deregistration threshold, which is currently £88,000 (as of April 2024).
  • HMRC must be satisfied that the business’s taxable turnover will remain below this threshold in the foreseeable future.
  • The business is not required to be registered under other compulsory rules (e.g. part of a VAT group).

Example

A small consultancy firm with a current VAT-taxable turnover of £85,000 anticipates no significant growth in the coming year due to a stable client base and limited-service capacity. To reduce compliance obligations and avoid the need to charge and account for VAT, the firm may apply for voluntary deregistration. If HMRC is satisfied with the business’s forecast, the deregistration request would typically be approved.

VAT Deregistration Process

A business can apply to cancel its VAT registration either online or by submitting a paper application. HMRC will confirm the cancellation date, usually within three weeks, and may contact the business if further information is needed.

Methods

  • Apply online through the business’s VAT online account.
  • Alternatively, complete and post form VAT7 (Application to Cancel VAT Registration).

Providing full and accurate information helps HMRC assess whether the deregistration request can be approved without delay.

After deregistration

  • A final VAT Return must be submitted for the period up to and including the cancellation date.
  • If the business holds stock or assets on which VAT was reclaimed, VAT may be payable if the total VAT due exceeds £1,000.
  • VAT records must be kept for six years after deregistration.

Conclusion

Understanding VAT obligations is not just a compliance exercise—it’s a vital part of running a responsible and financially sound business in the UK. Whether you’re newly established or expanding your operations, recognizing when to register or deregister for VAT can significantly impact your cash flow, tax reporting, and overall business efficiency. Missing key thresholds or deadlines can lead to avoidable penalties and administrative burdens, so staying informed and proactive is crucial.

If you’re unsure about your VAT position or need tailored guidance for your business, our expert team is here to help. We offer professional support on VAT registration, deregistration, and compliance planning to ensure you’re fully aligned with HMRC requirements. Whether you’re a UK-based company or an overseas entity trading in the UK, we’re ready to provide clear, practical advice to keep your business on the right track.

He is a driven ACCA in-the-making, passionate about taxation, financial reporting and corporate finance. With a keen eye for IFRS compliance, he's on a mission to master the world of accounting.
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