Does a Limited Company Have to Be VAT Registered

Find out if a UK limited company must register for VAT, when it becomes compulsory and when voluntary registration makes sense

This is one of the most common questions I am asked by directors setting up or running a limited company, and it is also one of the most misunderstood. Many people assume that forming a limited company automatically means you must register for VAT, while others delay registration without realising they have already crossed the line where VAT registration is compulsory.

In this article, I am going to explain clearly and practically whether a limited company has to be VAT registered, when registration becomes mandatory, when it is optional, and how to decide what is right for your business. I will also cover common myths, the risks of getting it wrong, and the practical factors I look at when advising clients in the real world.

By the end, you should have a clear answer to the question, and more importantly, a framework for deciding what to do next.

The short answer

No, a limited company does not automatically have to be VAT registered.

However, a limited company must register for VAT if its taxable turnover exceeds the VAT registration threshold, or if it expects to exceed that threshold within a short period. Outside of that, VAT registration may still be beneficial, but it is not compulsory.

That short answer hides a lot of detail, and it is the detail that matters.

What VAT registration actually means

Before going any further, it helps to be clear on what VAT registration involves.

When a limited company is VAT registered, it must:

  • Charge VAT on its taxable sales

  • Submit VAT returns to HMRC

  • Pay VAT due by the deadline

  • Keep digital VAT records

  • Comply with Making Tax Digital rules

VAT registration does not change your legal structure, and it does not change how Corporation Tax works, but it does affect pricing, cash flow, and administration.

The VAT registration threshold for limited companies

The VAT registration threshold applies to all businesses, including limited companies, sole traders, and partnerships. There is no special or lower threshold just because you operate through a limited company.

The current VAT registration threshold is £85,000 of taxable turnover.

This is not based on profit. It is based on turnover.

Taxable turnover includes:

  • Sales subject to VAT at 20 percent

  • Sales subject to VAT at 5 percent

  • Zero rated sales

It does not include VAT exempt income.

How the £85,000 threshold is measured

One of the biggest areas of confusion is how the VAT threshold is calculated.

It is measured on a rolling 12 month basis, not by reference to your accounting year or tax year.

This means you must look back at the last 12 months at the end of every month and ask whether your taxable turnover has exceeded £85,000.

If it has, VAT registration becomes compulsory.

This catches many directors out, especially in fast growing businesses.

When VAT registration becomes mandatory

A limited company must register for VAT if either of the following applies:

  • Its taxable turnover in the last 12 months exceeds £85,000

  • It expects taxable turnover to exceed £85,000 in the next 30 days alone

The second point is important. If you sign a large contract that will push you over the threshold quickly, you cannot wait until the money is spread over months.

In these cases, you must register immediately.

What happens if you register late

Failing to register for VAT on time can be expensive.

If HMRC decides you should have been registered earlier, they can:

  • Backdate your VAT registration

  • Demand VAT on past sales

  • Charge interest

  • Apply penalties

In practice, this can mean you have to pay VAT out of your own pocket if you did not charge it to customers at the time.

This is one of the biggest VAT shocks I see for limited company directors.

Does being a limited company change the rules?

This is a very common myth.

The VAT rules do not change simply because you trade through a limited company.

A limited company:

  • Has the same VAT threshold as a sole trader

  • Uses the same VAT schemes

  • Has the same filing deadlines

  • Faces the same penalties

The difference is often perception rather than law. Many people associate limited companies with being bigger or more established, but VAT law does not work that way.

Situations where a limited company does not have to register

There are several common situations where a limited company does not need to be VAT registered.

These include:

  • Turnover below the VAT threshold

  • Income that is entirely VAT exempt

  • Early stage or low volume trading

  • Companies set up for investment rather than trading

For example, a limited company providing VAT exempt services may never need to register, regardless of turnover.

VAT exempt income and limited companies

VAT exemption is often misunderstood.

If a limited company supplies VAT exempt services, it:

  • Does not charge VAT

  • Cannot reclaim VAT on costs linked to exempt income

  • Does not count exempt income towards the VAT threshold

Common VAT exempt activities include certain financial services, insurance, and education.

However, many companies assume they are exempt when they are not, which can lead to serious problems.

Voluntary VAT registration for limited companies

Even if a limited company does not have to register for VAT, it may choose to do so voluntarily.

Voluntary registration can make sense where:

  • The company incurs significant VAT on costs

  • Customers are VAT registered businesses

  • The company wants to appear more established

  • Margins can absorb the VAT impact

This is a strategic decision rather than a legal requirement.

Advantages of VAT registration for a limited company

In the right circumstances, VAT registration can be beneficial.

Potential advantages include:

  • Reclaiming VAT on business expenses

  • Improving credibility with customers and suppliers

  • Avoiding a sudden VAT shock later

  • Access to certain VAT schemes

For companies with high startup costs, VAT reclaims can be significant.

Disadvantages of VAT registration

VAT registration is not always a good idea.

Disadvantages can include:

  • Higher prices for non VAT registered customers

  • Increased administrative burden

  • More HMRC scrutiny

  • Cash flow pressure if VAT is not managed properly

For companies selling to the general public, VAT can directly affect competitiveness.

VAT registration and pricing strategy

One of the biggest practical issues is pricing.

If your limited company registers for VAT, you must decide whether to:

  • Add VAT on top of existing prices

  • Absorb VAT within current prices

This decision can significantly affect margins.

I always advise clients to model both scenarios before registering.

Flat Rate Scheme and limited companies

Some limited companies choose to register under the Flat Rate Scheme.

Under this scheme:

  • You charge VAT at the normal rate

  • You pay HMRC a flat percentage of turnover

  • You usually cannot reclaim VAT on expenses

This can simplify VAT and sometimes reduce the VAT payable, but it is not suitable for every business.

Importantly, the Flat Rate Scheme does not remove the need to register. It only changes how VAT is calculated.

Cash Accounting Scheme and limited companies

The Cash Accounting Scheme allows you to account for VAT when money is received or paid, rather than when invoices are raised.

This can help limited companies with cash flow issues, but again, it does not affect whether registration is required.

It only affects timing.

Making Tax Digital and limited companies

Once a limited company is VAT registered, it must comply with Making Tax Digital.

This means:

  • Keeping digital VAT records

  • Submitting VAT returns using compatible software

  • Maintaining digital links

This applies regardless of company size.

The administrative burden is manageable, but it does need to be planned for.

Group VAT registration for limited companies

Where multiple limited companies are under common control, VAT group registration may be an option.

This can:

  • Simplify VAT reporting

  • Eliminate VAT on intra group transactions

However, VAT group members are jointly and severally liable, which carries risk.

This is an area where professional advice is essential.

Common myths I hear from limited company directors

Over the years, I have heard many VAT myths repeated.

Some of the most common include:

  • Limited companies must be VAT registered

  • VAT only applies once you make a profit

  • You can wait until the end of the year to register

  • HMRC will not notice if you are late

All of these are wrong, and relying on them can be costly.

What happens if you deregister for VAT

If a limited company’s taxable turnover falls below the deregistration threshold, it may apply to deregister.

This can reduce admin and pricing pressure, but it must be handled carefully, especially if assets are involved.

VAT deregistration can trigger VAT charges on stock and assets, which often comes as a surprise.

How I decide whether to recommend VAT registration

In practice, there is no one size fits all answer.

When advising limited companies, I look at:

  • Customer type

  • Pricing flexibility

  • Margin levels

  • Growth plans

  • Cost structure

  • Cash flow

VAT registration is as much a commercial decision as a tax one.

What happens if you trade close to the threshold

Many limited companies hover around the VAT threshold.

In these cases, careful monitoring is essential.

You must:

  • Track rolling 12 month turnover monthly

  • Understand which income is taxable

  • Plan ahead for potential registration

Accidental late registration is one of the most common VAT problems I see.

Why getting this right matters

VAT mistakes can lead to:

  • Unexpected tax bills

  • HMRC penalties and interest

  • Disputes with customers

  • Cash flow stress

  • Time consuming compliance checks

For limited company directors, VAT errors can also create personal stress, even though the company is a separate legal entity.

Final thoughts

A limited company does not automatically have to be VAT registered, but it does have to register once it exceeds the VAT threshold or expects to do so. Beyond that point, registration is not optional.

Voluntary VAT registration can be beneficial in the right circumstances, but it should never be done without understanding the commercial impact.

In my experience, VAT is rarely a problem when it is planned for early. The biggest issues arise when directors assume VAT does not apply to them, or delay taking advice until it is too late.

If you are unsure whether your limited company needs to be VAT registered, or whether it should be, getting clarity early can save a great deal of money, time, and stress later on.