VAT for Limited Companies

Cross the VAT threshold by a single pound on a Tuesday, and it doesn't matter that your turnover drops comfortably back under it by Friday. The test isn't your financial year, and it isn't your calendar year — it's any rolling 12-month period, checked continuously, and once you've tipped over it, the registration clock has started whether you meant it to or not.

I've had this exact conversation with a client who genuinely didn't realise they'd crossed the threshold until three months after the fact, simply because nobody was tracking the rolling total in real time. It happens more often than you'd think, particularly for growing businesses with a lumpy, seasonal pattern of income. VAT is one of those areas where the rules are precise, the deadlines are firm, and the penalties for getting it wrong — even accidentally — are entirely real. This guide walks through registration, the scheme choices available to you, and the changes that matter most for 2026/27.

When Does a Limited Company Need to Register for VAT?

The Rolling 12-Month Test

Your obligation to register is triggered the moment your taxable turnover in any rolling 12-month period exceeds £90,000 — not your accounting year, not the tax year, but a continuously moving 12-month window, reassessed at the end of every single month.

What Counts as Taxable Turnover

Taxable turnover includes standard-rated, reduced-rated and zero-rated sales — yes, zero-rated sales count towards the threshold, even though no actual VAT is charged on them, which surprises a fair number of directors in food, publishing and children's products who assume, wrongly, that their zero-rated income sits outside the calculation entirely. Exempt income, by contrast, genuinely doesn't count.

The 30-Day Notification Window

Once you've crossed the threshold, you have 30 days to notify HMRC, and your effective date of registration is fixed as the first day of the second month after the month you crossed it — a deadline that arrives faster than most directors expect, particularly if they weren't watching the rolling total closely in the first place.

VAT Registration Threshold 2026/27

£90,000, Checked Continuously

The threshold itself is £90,000 for 2026/27, unchanged from the previous year, having been raised from £85,000 back in April 2024.

Why "Rolling 12 Months" Catches People Out

The most common mistake I see is a director checking their turnover once, at the end of their financial year, and concluding they're comfortably under the threshold — without realising that any 12-month stretch, ending on any date, could already have tipped over it. A strong final quarter riding on the back of a quieter earlier period can push a rolling total over £90,000 well before the company's own year end arrives.

Deregistering If You Drop Below the Threshold

If your turnover genuinely falls, and you expect it to stay below the deregistration threshold for the following 12 months, you can apply to deregister. It's not automatic, and it's worth thinking through carefully before doing it — deregistering means you stop being able to reclaim input VAT on your own purchases, which isn't always the obvious win it first appears.

Should My Company Voluntarily Register for VAT?

The Case for Registering Early

Registering before you're legally required to can make sense if most of your customers are themselves VAT-registered businesses, able to reclaim the VAT you charge without it costing them anything extra — in which case, registering early simply lets you start reclaiming VAT on your own costs sooner, with no real downside to your customers.

The Case Against

If your customers are primarily members of the public, or VAT-exempt businesses who can't reclaim VAT at all, registering voluntarily means either absorbing the VAT yourself, cutting into your margin, or passing on a 20% price increase your customers simply weren't expecting.

Who Benefits Most From Voluntary Registration

Early-stage businesses with significant upfront costs — equipment, stock, professional fees — often benefit considerably from voluntary registration, because it unlocks input VAT recovery on real spending right from day one, well before turnover would otherwise force registration anyway.

Flat Rate Scheme – Is It Still Worth It?

How the Flat Rate Scheme Works

Under the Flat Rate Scheme, you still charge your customers the standard 20% VAT rate, but instead of separately tracking and reclaiming input VAT on every purchase, you simply pay HMRC a single, fixed percentage of your gross turnover, keeping the difference. It's available if your expected VAT-taxable turnover is £150,000 or less, and you're required to leave once your VAT-inclusive income passes £230,000.

The Limited Cost Trader Trap – 16.5%

This is where the scheme has become considerably less attractive than it once was. If the goods your business buys cost less than 2% of turnover, or less than £1,000 a year — whichever is higher — you're classified as a "limited cost trader" and forced onto a flat rate of 16.5%, regardless of your actual sector. For a typical consultancy or service business with genuinely low goods spend, that 16.5% rate on gross turnover often works out worse than simply staying on standard VAT accounting and reclaiming real input VAT.

The First-Year Discount

New registrants get a 1 percentage point discount off their normal flat rate for the first 12 months after registration — a modest saving, but a genuine one, worth factoring into the first-year decision even if the scheme looks marginal thereafter.

When It's Genuinely Worth Considering

The Flat Rate Scheme still makes sense for businesses with low, genuine input VAT to reclaim in the first place, sitting in a sector rate meaningfully below 20%, and who value the administrative simplicity of not tracking every purchase. For most service-based limited companies with modest costs, though, it's worth running the actual comparison before assuming it's the simpler, cheaper option — because increasingly, for exactly that profile of business, it isn't.

VAT Cash Accounting Scheme

How It Differs From Standard VAT Accounting

Under standard VAT accounting, you account for VAT based on invoice dates — you owe HMRC output VAT the moment you invoice a customer, whether or not they've actually paid you yet. Cash accounting changes that entirely: you only account for VAT once money actually changes hands, both on sales and on purchases.

Who It Suits

This is genuinely valuable for businesses dealing with slow-paying customers, because it means you're never left funding a VAT bill to HMRC out of your own pocket on an invoice that hasn't been paid — a real cash flow risk under standard accounting that cash accounting removes entirely.

Eligibility and Limits

You can join if your VAT-taxable turnover is £1.35 million or less, and you generally need to leave once turnover exceeds a higher threshold. It's compatible with the Flat Rate Scheme's own cash-based variant, though not with the standard Flat Rate Scheme calculation in quite the same way — worth checking the specific combination with us before assuming both apply together automatically.

Making Tax Digital for VAT

What MTD Actually Requires

Making Tax Digital has been mandatory for every VAT-registered business since 2022, regardless of turnover — there's no longer a small-business exemption. It requires digital record-keeping throughout the year, and VAT returns submitted directly through MTD-compatible software rather than typed manually into HMRC's online portal.

Compatible Software

Spreadsheets can still technically be part of an MTD-compliant setup, provided they're linked to compatible bridging software that submits the return digitally — but for most of our clients, dedicated cloud accounting software makes the whole process considerably smoother, and gives us live visibility of your figures throughout the quarter rather than just at return time.

What Happens If You're Not Compliant

Manual VAT returns, typed directly into HMRC's old portal, are simply no longer an option for the vast majority of businesses. Non-compliance can trigger penalties, and more practically, makes it far harder to catch errors before they compound across several quarters — one of the quieter but genuinely valuable benefits of proper MTD software is that it surfaces mistakes early, while they're still cheap to fix.

VAT on Director Expenses

Reclaiming VAT on Genuine Business Costs

VAT paid on costs incurred wholly for business purposes is reclaimable in the normal way, provided you hold a valid VAT invoice and the cost genuinely relates to your taxable business activity.

Mixed-Use Expenses

Where a cost is genuinely mixed between business and personal use — a phone contract, a vehicle, a portion of home running costs — only the business proportion of the VAT can be reclaimed, and it needs a fair, defensible apportionment, exactly as we cover in our guide to allowable expenses more generally.

What You Can't Reclaim

Client entertaining VAT is specifically blocked from recovery, mirroring its disallowance for corporation tax purposes. VAT on cars is also generally irrecoverable unless the vehicle is used exclusively for business with genuinely no private use at all — a bar few company cars in practice actually clear, which is worth bearing firmly in mind before assuming a new company car's VAT is automatically reclaimable.

VAT rewards attentiveness far more than it rewards good intentions. The rolling threshold, the scheme choices, and the ever-present MTD requirements all move quietly in the background of a growing business, and the businesses that stay comfortably compliant are, without exception, the ones tracking their position continuously rather than checking once a year. If you'd like us to review whether you're approaching the threshold, whether your current scheme still suits you, or simply want your VAT process tightened up, get in touch with the team at Cannon Accountants.

For the wider picture of how VAT fits alongside corporation tax, expenses and everything else covered in this series, head back to our complete Limited Company Tax Guide 2026/27: Corporation Tax, Dividends & Director Tax →.

Disclaimer:

The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.