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

If you are running a limited company in the UK, VAT registration is one of the key decisions you will face early on. While VAT can affect how you invoice customers, handle business costs and file returns, not all companies are required to register from the outset.

This article explains when VAT registration is compulsory, when it is optional, and what to consider before making the decision. Whether you are a new company or a growing business, it is important to understand how VAT applies to your situation.

What is VAT?

VAT (Value Added Tax) is a tax added to most goods and services sold in the UK. Businesses registered for VAT must charge it on their taxable sales, submit VAT returns to HMRC and pay any VAT due. They can also reclaim VAT paid on business expenses, provided those costs relate to VATable activities.

There are three main VAT rates in the UK:

  • Standard rate: 20%

  • Reduced rate: 5% (applies to some energy, health and safety products)

  • Zero rate: 0% (for example, most food and children’s clothing)

Some items are exempt from VAT altogether, such as financial services, education and insurance.

Does every limited company have to register for VAT?

No. A limited company does not have to register for VAT unless it meets certain criteria. Registration becomes compulsory when:

  • Your VAT taxable turnover exceeds the current threshold (which is £90,000 as of April 2024) in any rolling 12-month period

  • You expect your taxable turnover to exceed the threshold in the next 30 days alone

This threshold applies to all UK businesses, not just limited companies.

If you do not meet these thresholds, you can choose to register voluntarily if it makes financial or strategic sense for your business.

What is VAT taxable turnover?

This is the total value of everything you sell that is subject to VAT. It includes:

  • Standard rated goods and services

  • Reduced rate and zero-rated items

  • Items you supply to VAT-registered customers in the EU

It does not include VAT-exempt sales or income from outside the scope of VAT (such as grants or loans).

What happens if you go over the threshold?

Once your VAT taxable turnover exceeds £90,000 in any 12-month rolling period, you must register with HMRC within 30 days of the end of the month in which you exceeded it. If you expect to exceed it in a single 30-day period, you must register immediately.

If you fail to register on time, you may face penalties and will still owe VAT on sales made from the date you were supposed to register.

Can a limited company register for VAT voluntarily?

Yes. Even if you are below the threshold, you can choose to register. This is common for:

  • Startups with high setup costs who want to reclaim VAT on expenses

  • Businesses that sell mainly to other VAT-registered businesses

  • Companies that want to appear more established or professional

However, registering voluntarily also means:

  • Charging VAT to customers, which could increase your prices

  • Submitting quarterly VAT returns

  • Keeping detailed records for compliance

If your clients are mainly consumers or small businesses who are not VAT registered, adding VAT might make your services seem more expensive.

What are the pros and cons of VAT registration?

Pros:

  • You can reclaim VAT on business expenses

  • It enhances credibility, especially for B2B businesses

  • It may save you money if you make a lot of VATable purchases

  • You must comply with Making Tax Digital (MTD), which often improves bookkeeping discipline

Cons:

  • You must charge VAT on sales, which could deter some customers

  • You must submit VAT returns (usually every three months)

  • You need to keep digital records and use MTD-compatible software

  • Errors or delays can lead to penalties and interest

What is Making Tax Digital (MTD)?

MTD is a government initiative requiring VAT-registered businesses to keep digital records and submit VAT returns using approved software. As of April 2022, all VAT-registered businesses, including those under the threshold who registered voluntarily, must follow MTD rules.

This means you will need software such as Xero, QuickBooks, FreeAgent or similar to manage your VAT obligations.

What if my company is not VAT registered?

If your business is not VAT registered:

  • You do not charge VAT on your invoices

  • You cannot reclaim VAT on your business purchases

  • You still need to monitor your turnover carefully in case you cross the threshold

  • You must update your pricing and systems if you later register for VAT

Real-world example

Sarah runs a limited company providing social media marketing services. Her turnover is currently £70,000 a year. She chooses not to register for VAT yet because most of her clients are small businesses and not VAT registered themselves. Charging VAT would make her prices less competitive.

On the other hand, Jack owns a limited company providing IT consultancy. Although his turnover is £60,000, he registers voluntarily because most of his clients are VAT registered. This means they can reclaim the VAT he charges, and Jack benefits from reclaiming VAT on his own costs.

Final thoughts

A limited company only needs to register for VAT once its taxable turnover exceeds the threshold, currently £90,000. However, voluntary registration is an option that can work well for businesses with VATable expenses or mainly B2B clients.

VAT registration brings extra responsibilities, but also opportunities for better tax efficiency and financial discipline. Make sure you understand your turnover position, assess your customer base and speak to an accountant if you are unsure whether to register.