VAT registration, schemes, returns and penalties for startups

This guide covers when a UK startup must register for VAT, when registering early makes sense, and how to account for VAT once registered, from choosing a scheme to filing returns and avoiding penalties.
By Buzz Accounting · Updated 16 September 2026

When a startup has to think about VAT

VAT is a tax on sales of goods and services. A VAT-registered business adds VAT to its prices, reclaims the VAT it pays on business costs, and pays HMRC the difference, usually every three months. You must register once your taxable turnover passes £90,000, and you can choose to register before then.

Registering late means paying HMRC VAT on the sales made since the date you should have registered, whether or not you charged it. Registering early can cost very little if your customers are VAT-registered businesses, and it lets you reclaim VAT on set-up costs. If you sell to consumers, registering early either raises your prices or reduces what you keep from each sale.

Once registered, you choose how to account for VAT, keep digital records, file returns through software, and face penalties and interest if returns or payments are late. The sections below cover each of these and end with a worked example for a software startup. Our VAT calculator adds VAT to, or removes it from, any amount.

What this guide covers

The £90,000 threshold and both registration tests
Registering early and reclaiming set-up costs
Standard, cash accounting and Flat Rate schemes
Returns, Making Tax Digital, rates and penalties

The two tests for compulsory registration

HMRC's guide to registering for VAT sets two tests, and you must check both.

Taxable turnover over the last 12 months

At the end of every month, add up your taxable turnover for the previous 12 months. If it is over £90,000, you must register within 30 days of the end of that month, and your registration takes effect from the first day of the second month after you went over. If your rolling total first passes £90,000 in March, you must register by 30 April and you are registered from 1 May.

Taxable turnover in the next 30 days alone

If you expect your taxable turnover in the next 30 days alone to be over £90,000, you must register by the end of that 30-day period, and registration takes effect from the date you realised. If on 3 August you agree a £95,000 contract to be delivered and invoiced within the month, you must apply by 1 September and are registered from 3 August.

What counts as taxable turnover

Taxable turnover is the value of everything you sell in the UK that is not exempt from VAT, including zero-rated sales. It also includes services bought from businesses abroad that you must account for under the reverse charge, where you work out and pay the VAT yourself as if you had supplied the service. Exempt sales and sales treated as made outside the UK, such as most services sold to overseas business customers, are left out. Our guide to VAT when a startup sells overseas explains those rules.

If turnover passes £90,000 only temporarily, HMRC can grant an exception if you show it will stay below £88,000 over the next 12 months.

Registering late

If you register late, you owe VAT on sales made from the date you should have been registered, even where you did not charge it, and HMRC can charge a penalty of up to the full amount of that VAT, depending on how much you owe and how late you registered. While you wait for your VAT number you cannot show VAT on invoices, but you can raise your prices to cover it and reissue invoices showing VAT once the number arrives.

Registering voluntarily

You can register below the threshold, and before you start trading, as long as you are in business and intend to make taxable sales. When you register voluntarily you choose your registration date, and it can be backdated by up to 4 years. The date cannot be changed once HMRC has registered you, and it fixes which earlier costs you can reclaim, as VAT Notice 700/1 explains.

Selling to VAT-registered businesses

A business customer pays your VAT and reclaims it, so a £1,000 invoice becomes £1,200 and still costs them £1,000. You reclaim VAT on your own costs from the registration date, plus eligible costs from before it. The main cost of registering early is the work of keeping digital records and filing returns.

Selling to consumers

A consumer cannot reclaim VAT, so registering means either raising prices by 20% or keeping prices where they are and paying the VAT out of them. On a £10 monthly plan, keeping the price means paying HMRC £1.67 of each payment (£10 ÷ 6) and keeping £8.33. With 1,000 subscribers that comes to £1,667 a month, or £20,000 a year, before any VAT reclaimed on costs. Unless the VAT you could reclaim on costs is larger, a startup selling to consumers is usually better off waiting until registration is compulsory and planning the price change in advance.

Reclaiming VAT on costs from before registration

When you register, you can reclaim VAT paid before your registration date within two time limits, set out in section 11 of VAT Notice 700.

Goods bought up to 4 years before registration, such as laptops, equipment and stock, if you still hold them or they were used to make goods you still hold. VAT on goods used up before registration cannot be reclaimed.
Services received up to 6 months before registration, such as design work, legal fees and software subscriptions, unless they related to goods you disposed of before registering.

The costs must have been for the business that is now registered and must relate to its taxable sales. Keep a dated list of the goods and services, and claim the VAT on your first VAT return. A company can reclaim VAT on costs from before it was incorporated only if the item was bought by someone who became a director, shareholder or employee, they were fully reimbursed, and they were not VAT registered at the time.

Choosing how to account for VAT

Under standard accounting, the VAT you pay is the VAT on the sales invoices you issued in the period minus the VAT on the purchase invoices you received, whether or not those invoices have been paid. Three schemes change how the bill is worked out.

Scheme	Can join if expected taxable turnover is	Must leave when turnover goes over	VAT bill is based on	VAT on costs
Standard accounting	Any amount	Does not apply	Invoices issued and received	Reclaimed from purchase invoices
Cash Accounting Scheme	£1.35 million or less	£1.6 million	Payments received and made	Reclaimed when you pay the supplier
Flat Rate Scheme	£150,000 or less, excluding VAT	£230,000, including VAT	A fixed percentage of VAT-inclusive turnover	Only single capital purchases of £2,000 or more
Annual Accounting Scheme	£1.35 million or less	£1.6 million	One annual return, with advance payments	Reclaimed as normal, with one refund a year

The Annual Accounting Scheme replaces quarterly returns with one return a year and advance payments. It allows only one refund a year, so it does not suit a startup that regularly reclaims more VAT than it pays.

Cash Accounting Scheme

Under the Cash Accounting Scheme you pay VAT on sales when customers pay you, and reclaim VAT on purchases when you pay suppliers. It cannot be used for invoices raised in advance, invoices with payment terms of 6 months or more, or alongside the Flat Rate Scheme. If a customer pays late, you pay the VAT later, and if a customer never pays, you pay no VAT on that invoice.

Flat Rate Scheme

Under the Flat Rate Scheme you charge customers VAT at the normal rate but pay HMRC a fixed percentage of your VAT-inclusive turnover. You cannot reclaim VAT on purchases, except on a single purchase of capital goods costing £2,000 or more including VAT. The percentage depends on your business sector, less 1% in your first year of VAT registration.

You are a limited cost business, and pay 16.5% whatever your sector, if your spending on relevant goods, including VAT, is less than 2% of your VAT-inclusive turnover or less than £1,000 a year (£250 a quarter). Relevant goods leave out all services, capital items such as laptops, food and drink for you or your staff, vehicle costs, and goods for resale unless selling goods is your main business. Under the examples in VAT Notice 733, downloaded software, advertising, rent and accountancy fees all count as services, so a startup whose costs are mostly services and equipment is likely to be a limited cost business.

VAT returns and payment deadlines

VAT returns usually cover 3 months. The return and the payment are both due one calendar month and 7 days after the end of the period, so a quarter ending 30 September is due by 7 November. The payment must reach HMRC's account by the deadline, including when it falls on a weekend or bank holiday. A Direct Debit set up through your VAT online account at least 3 working days before you file is collected 3 working days after the deadline, as HMRC's guide to sending a VAT return explains.

If you expect to reclaim more VAT than you pay, you can ask HMRC for monthly returns so repayments come sooner.
You can correct past errors on your next return if their net value is £10,000 or less, or up to £50,000 if that is below 1% of your total sales. Larger errors, and any deliberate error, must be reported to HMRC separately, and HMRC can charge a penalty of up to 100% of VAT under-stated or over-claimed on an inaccurate return.

Making Tax Digital

Every VAT-registered business must follow the Making Tax Digital rules unless HMRC has agreed an exemption, and HMRC signs businesses up automatically when they register. The rules, in VAT Notice 700/22, require you to keep your VAT records in compatible software and to send returns to HMRC from that software. Records passed between programs, such as from a spreadsheet into filing software, must move digitally, with no copying of figures by hand. Accounting software such as Xero keeps the records and files the return in one place.

VAT rates and exempt sales

There are three rates of VAT, and some sales are exempt. HMRC publishes a list of VAT rates on goods and services.

Standard rate, 20%. Most goods and services, including software subscriptions, apps and consultancy unless a specific relief applies.
Reduced rate, 5%. A short list including children's car seats and domestic fuel and power.
Zero rate, 0%. Including most food, children's clothes and shoes, books and e-books (audiobooks are standard-rated), and goods exported from the UK when the conditions are met.
Exempt. Including insurance, lending and other financial services, health services from registered health professionals, and education and training from eligible bodies such as colleges and universities.

Zero-rated sales count towards the registration threshold, and you can reclaim VAT on the costs of making them. Exempt sales do not count towards the threshold, and VAT on costs that relate to them generally cannot be reclaimed. A startup with both exempt and taxable sales can normally reclaim only the VAT on costs that relates to its taxable sales, which HMRC calls partial exemption.

Penalties and interest

Late returns

Each late return, including a nil return, earns a penalty point. When your points reach the threshold for how often you file, you pay a £200 penalty, and another £200 for each late return after that while you remain at the threshold. The thresholds are set out in HMRC's penalty points guidance.

Annual returns, 2 points
Quarterly returns, 4 points
Monthly returns, 5 points

Your first VAT return after registering does not attract a point. Below the threshold, each point expires after 24 or 25 months, depending on the return's due date. At the threshold, points are cleared only by filing every return on time for a period of compliance, which is 12 months for quarterly returns, and having no returns outstanding for the previous 24 months.

Late payment

Penalties for late payment depend on how late the VAT is paid, under HMRC's late payment rules.

Paid within 15 days of the due date, there is no penalty.
Paid between day 16 and day 30, the penalty is 3% of the VAT outstanding at day 15.
Paid on day 31 or later, the penalty is 3% of the VAT outstanding at day 15, plus 3% of the VAT outstanding at day 30, plus a second penalty charged daily at 10% a year on the balance from day 31 until it is paid.

Asking HMRC for a Time to Pay arrangement before those days pass can mean lower penalties or none. Late payment interest is charged as well, from the first day the VAT is overdue, at the Bank of England base rate plus 4%, as HMRC's interest guidance explains.

Worked example for a software startup

The figures are illustrative. A startup selling software subscriptions to UK businesses registers voluntarily with a registration date of 1 July 2026 and files quarterly returns.

VAT on set-up costs

Laptops bought in January 2026 for £3,600 including £600 VAT, still in use, so £600 is reclaimable.
Brand and website design invoiced in March 2026 for £4,800 including £800 VAT, less than 6 months before registration, so £800 is reclaimable.
Software subscriptions from a UK supplier from February to June 2026, five months at £120 including £20 VAT, so £100 is reclaimable.
Legal fees for the shareholders' agreement invoiced on 20 November 2025 for £2,400 including £400 VAT, more than 6 months before registration, so the £400 cannot be reclaimed.

The startup claims £600 + £800 + £100 = £1,500 on its first return. Had it chosen 1 May 2026 as its registration date, the legal fees would have fallen within 6 months and a further £400 would have been reclaimable, although it would then have had to charge VAT on its sales from 1 May.

The first quarter

From July to September 2026 the startup invoices UK customers £45,000 plus £9,000 VAT, a total of £54,000, and pays £9,000 of UK costs plus £1,800 VAT.

Standard accounting. £9,000 − £1,800 − £1,500 = £5,700, to be filed and paid by 7 November 2026. In a normal quarter without the set-up claim, the bill is £9,000 − £1,800 = £7,200.
Cash Accounting Scheme. If customers have paid £36,000 of the £54,000 by 30 September, VAT on sales is £36,000 ÷ 6 = £6,000, because at 20% the VAT is one sixth of a VAT-inclusive amount. With all its costs paid, the bill is £6,000 − £1,800 − £1,500 = £2,700, and the £3,000 of VAT on the unpaid £18,000 is paid in the quarter the customers pay.
Flat Rate Scheme. The startup spends £150 on relevant goods in the quarter, under the £250 limit, so it is a limited cost business. It would pay £54,000 × 15.5% = £8,370 a quarter in its first year and £54,000 × 16.5% = £8,910 after that, against £7,200 under standard accounting.

Paying late

If the £5,700 reached HMRC 40 days after the 7 November deadline, the first penalty would be 3% × £5,700 = £171 at day 15 plus £171 at day 30, making £342. The second penalty would run from day 31 to day 40, at £5,700 × 10% × 10 ÷ 365 = £15.62. Late payment interest would be added from 8 November.

Help with VAT

Our VAT service handles the registration decision, the choice of scheme and every quarterly return for startups.

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Common questions

What is the VAT registration threshold?

The VAT registration threshold is £90,000 of taxable turnover. You must register if your taxable turnover for the previous 12 months goes over £90,000 at the end of any month, or if you expect it to go over £90,000 in the next 30 days alone. Taxable turnover includes zero-rated sales and services bought from abroad that you reverse charge, and leaves out exempt sales and sales made outside the UK. You can ask to deregister if taxable turnover falls below £88,000.

Should my startup register for VAT voluntarily?

Registering voluntarily usually makes sense if your customers are mostly VAT-registered businesses, because they reclaim the VAT you charge and you can reclaim VAT on your own costs, including eligible costs from before registration. If you sell to consumers, registering means raising prices by 20% or paying the VAT out of your current prices, so waiting until registration is compulsory usually costs less unless the VAT you would reclaim on costs is larger. You choose the registration date, and it cannot be changed afterwards.

Can I reclaim VAT on costs from before I registered?

You can reclaim VAT on goods bought up to 4 years before registration if you still hold them, and on services received up to 6 months before registration. The costs must be for the business that is now registered and relate to its taxable sales. Keep a list of the goods and services with their dates and claim the VAT on your first return. VAT on costs from before a company was incorporated can only be reclaimed when a future director, shareholder or employee bought the item, was fully reimbursed and was not VAT registered at the time.

What is a limited cost business under the Flat Rate Scheme?

A limited cost business is one whose spending on relevant goods, including VAT, is less than 2% of its VAT-inclusive turnover or less than £1,000 a year, which is £250 a quarter. It pays a flat rate of 16.5% whatever its sector, or 15.5% in its first year of VAT registration. Services of every kind, capital items such as laptops, food and drink for staff, and vehicle costs do not count as relevant goods, so startups whose costs are mostly software, advertising and salaries often fall under the rule.

When are VAT returns and payments due?

VAT returns and payments are both due one calendar month and 7 days after the end of each VAT period, which is usually 3 months long. For a quarter ending 30 September, the deadline is 7 November. The payment must reach HMRC's account by then, even if the deadline falls on a weekend or bank holiday. If you pay by Direct Debit set up at least 3 working days before you file, HMRC collects the payment 3 working days after the deadline.

What are the penalties for late VAT returns and payments?

Each late return earns a penalty point, and a quarterly filer pays £200 on reaching 4 points and £200 for every later late return while at that level. Late payment carries no penalty if the VAT is paid within 15 days. Between day 16 and day 30 the penalty is 3% of the VAT outstanding at day 15, and from day 31 a further 3% is added plus a daily penalty at 10% a year. Late payment interest at the Bank of England base rate plus 4% runs from the first day overdue.