Why you're getting VAT wrong (and what to do about it!)

mystylefinance
Oct 7
3 min read

A business owner recently mentioned a myth that VAT registration only becomes worth it once sales hit £110,000.

Apparently, below that, ‘you’ll just lose money’. Let’s clear that up right now - that’s not how VAT works.

You have to register once you hit £90k

Legally, registration for VAT is required once taxable turnover reaches £90,000 in any rolling 12-month period. That’s a non-negotiable.

It’s also possible to register before that (voluntarily), and for many businesses, it actually makes sense to do so earlier, depending on who the customers are and what the expenses look like (more on this later).

But this idea that VAT registration only becomes beneficial after £110k in sales? Completely false.

VAT shouldn’t cost you a penny

When VAT is added to invoices, that money is collected on behalf of HMRC. It’s not earned income and doesn’t belong to the business. VAT is collected on sales and reclaimed on business expenses. At the end of each quarter, the difference is paid to HMRC.

If the VAT is set aside as it comes in, paying the VAT bill won’t affect profits - it’s simply passing on money that was never yours.

For example…

Pre-VAT registration, you charge your client £1,000 for your services. The client pays you £1,000, and you get to keep the full amount.

Post-VAT registration, you charge the client £1,200 for the same services. This gives:

£1,000 sales income, exactly as before registration
£200 VAT income - tax collected on behalf of HMRC, not part of sales income

By correctly increasing pricing to account for VAT, the same amount is still received as income.

When VAT does feel painful

VAT only becomes a problem when:

The VAT money has been spent instead of saved
Customers aren’t VAT-registered, so they feel prices have gone up and decide to shop elsewhere
VAT isn’t being tracked properly, resulting in a surprise bill

These are management issues, not VAT issues. The good news is that steps can be taken to fix this.

How to do it properly

To make VAT work smoothly and never feel like a burden:

Separate it - move the VAT portion from every payment into a savings account as soon as it lands. The full amount received from a customer isn’t all yours; only the sales portion is. The VAT part belongs to HMRC - it’s just being held until it’s time to pay it over.
Automate it - use accounting software like Xero to track VAT automatically.
Choose the right scheme - flat rate or cash accounting schemes can simplify things depending on the setup.
Reclaim everything possible - software, equipment, and even some pre-registration costs all count.
Get advice early - don’t wait until the threshold is crossed to sort systems.

Why early registration can actually help

Registering for VAT before reaching £90k can make sense if:

Most sales are to VAT-registered businesses (they can reclaim it, so prices don’t effectively rise)
There are large setup or equipment costs and VAT can be reclaimed on them
The business wants to appear more established or credible to bigger clients

The takeaway

Ultimately, there is no magic point where VAT ‘starts making money’ - it depends on the business model and how cash is managed.

VAT registration doesn’t cost money if it’s done right. It’s about understanding that VAT isn’t income and keeping it separate.

Need help? Reach out to us here.