London shops and the £90,000 VAT line: check it monthly

The most expensive VAT mistake a small business can make is not a wrong figure on a return. It is crossing the registration threshold and not noticing. The threshold is £90,000 of taxable turnover, and the rules for spotting it are less obvious than the number.

Turnover is not profit

VAT registration is triggered by taxable turnover: what you sell, not what you keep. A London shop with high rent and thin margins can pass £90,000 while taking home very little. Taxable turnover includes everything you sell that is not VAT exempt or out of scope, which covers standard-rated, reduced-rated and zero-rated goods. Zero-rated sales count towards the line even though you charge no VAT on them.

The £90,000 is measured across the whole of the business that registers, not per shop, stall or sales channel. If a sole trader runs a café, an online shop and a market stall, those sales are added together.

Two tests, and either one can catch you

HMRC applies two separate tests.

The first looks backwards. You must register if your total taxable turnover for the last 12 months goes over £90,000. This is a rolling 12 months, not a tax year or a calendar year, so it has to be checked at the end of every month, not once a year at accounts time.

The second looks forwards. You must also register if you expect your taxable turnover to go over £90,000 in the next 30 days alone. A single large order or a wholesale contract can trigger it.

The dates that matter

Under the backwards test, you must register within 30 days of the end of the month when you went over the threshold. Your registration takes effect from the first day of the second month after you went over.

Illustration, not a real business. Priya runs a small skincare brand from a unit in east London. Her rolling 12-month taxable turnover goes over £90,000 during October. The month ends on 31 October, so she has until 30 November to register, and her effective date of registration is 1 December.

The effective date is the one that catches people out. From that date you owe VAT on your sales, whether or not you have registered. Register late and you must pay VAT on every sale made since the date you should have registered, even if you never charged it to your customers. That bill can fall on your own margin, and HMRC may add a penalty depending on how much you owe and how late you are.

Under the forward test, you must register by the end of that 30-day period, and your effective date is the date you realised.

What to check every month

You do not need software. You need a habit, or a rolling 12-month VAT threshold tracker that does the adding up.

1. Add up your taxable sales for the last 12 months, across every channel you use.

2. Compare the total with £90,000.

3. Look at the next 30 days. Could sales in those 30 days alone, from a large order or a contract, pass £90,000?

4. Write the answer down with the date. If HMRC ever asks when you realised, a dated note helps.

Do it in the first week of the month, when last month's sales are fresh. One rule of thumb, not an HMRC figure: above £80,000, treat it as a warning and look again mid-month too.

You can register before you have to

You can choose to register if your turnover is less than £90,000. This is voluntary registration. Whether it makes sense depends on who your customers are and what VAT you pay on your costs, so it is worth a short conversation with an accountant first. The point is that it becomes a decision on your own timetable, not a deadline that arrives by surprise.

What changes once you are registered

Registering is the start. You must charge VAT on your taxable sales, send returns to HMRC and keep records. When you register, HMRC signs your business up to Making Tax Digital for VAT, unless it is exempt. In plain terms, your VAT records are kept digitally and sent through software.

Plan that before registration day. Decide which software you will use, how your sales reach it, and who in the business owns the VAT return. Settle those answers first, then work through registering for VAT.

Set a reminder for the first week of November. Add up the last 12 months and look at the next 30 days. Five minutes now costs less than a VAT bill you cannot pass on to anyone.

About the author

Harvey Dhillon is the founder and CEO of Zmartly, a UK accountancy firm for small businesses. He grew up in West London and worked in finance roles in investment banking, wealth management and private equity, starting at Barclays, before leaving in 2020 to build the firm. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by T (@tanyabarrow) on Unsplash.