A guide to using HMRC’s new VAT Registration Estimator tool

Launched on 10 July 2024, HMRC’s VAT Registration Estimator is an online tool that enables businesses to work out the potential impact of registering for VAT. It can tell you when VAT registration may be necessary and provide an estimate of the effect it may have on your business profits.

Below, you’ll find everything you need to know about this new guidance tool. We also provide step-by-step instructions on accessing and using the VAT Registration Estimator, including the information you need to enter and the types of results you may receive.

What is the VAT Registration Estimator tool?

Developed in response to feedback from small businesses, HMRC’s VAT Registration Estimator tool can give you an idea of what VAT registration might mean for your particular business. 

By inputting information about your business income and costs, along with the VAT rates applicable to your sales and purchases, you can use this online tool to help you work out:

• if you are legally required to register for VAT 
• the point at which your business turnover may require you to register 
• if you can de-register your business for VAT
• the amount of VAT you might owe to HMRC in an accounting period
• how much VAT you may be able to reclaim on any eligible purchases your business makes 
• the effect of VAT registration on your profits
• whether voluntary VAT registration may be worthwhile when your taxable turnover is below the threshold for compulsory registration

You can use it multiple times to experiment with different income and costs scenarios for comparison purposes. This is useful for seeing the potential outcome of various business conditions.

The tool is free to use and available online to all types of businesses. You don’t need a Government Gateway account to access it, so you can even use it for research purposes when setting up a company or other types of small business.

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On the launch of the new tool, Jonathan Athow, HMRC’s Director General for Customer Strategy and Tax Design, said:

“We know that the majority of our customers want to get their tax right. We have listened to what businesses have said and the new tool is designed to help them understand VAT registration, including when they might be required to register.”

“The VAT Registration Estimator has been developed in partnership with small businesses and trade representatives who tested the online tool and gave feedback before its launch.”

“We hope it will support businesses’ understanding of VAT registration, especially when combined with our guidance and other services.”

How to use the VAT Registration Estimator

To use HMRC’s VAT Registration Estimator tool, you will need to provide certain information about your business income and costs, including:

• the income you’ve received
• how much you’ve paid for stock or materials
• the overhead costs associated with running the business

You should be able to find this information in your current and past business records (e.g. annual accounts) and any business plans you’ve drawn up. 

You will also need to know the VAT rates that apply to your business income and costs and what proportion of these are VAT-exempt or ‘out of scope’ for VAT. 

If you’re unsure where to find this information, you can check your invoices (for your costs) and HMRC’s guidance page on rates of VAT on different goods and services

Once you have all of the relevant details, follow the steps outlined below. The process should take you approximately 20 minutes to complete on the first use.

Step 1. Visit GOV.UK

Visit GOV.UK to access the VAT Registration Estimator tool online. Scroll to the bottom of the guidance page and click on ‘Start now’.

Step 2. Provide information on your business income 

In the first section of the tool, you will answer a series of questions about your business income. You will be presented with some or all of the following questions (they may vary, depending on the answers you provide): 

Does your business have an establishment in the UK or Isle of Man? 

For VAT purposes, an ‘establishment’ is a place where:

• essential management decisions are made
• the business carries out its main administration
• the business has a permanent presence to make or receive supplies of goods or services that are taxable (aka ‘taxable supplies’) 

Taxable supplies are goods or services that are made in the UK and are not exempt from VAT. They include supplies that have a zero rate of VAT.

Do you sell taxable supplies of goods or services in the UK?

You should only use income and cost figures for sales made in the UK. If the answer to this question is ‘No’, you can’t register for VAT in the UK.

How many months have you based your business income and costs figures on? 

Round to the nearest whole number of months – for example, enter ‘12’ rather than ‘1’ year. The maximum number of months you can enter is 12. 

What is your approximate business income for this X-month period? 

If you’re using your annual accounts to obtain this figure, you should be able to find the relevant information in the profit and loss account. 

The figure you provide must relate only to the business you’re checking for VAT purposes. Don’t include any personal income you receive from employment with a different business.

Is any of this business income out of scope for VAT?

If you answer ‘Yes’ to this question, you will also be asked what approximate percentage of this business income is out of scope for VAT.

Some examples of business income that’s out of scope for VAT are:

• supplies of services to a business outside the UK
• grants or donations
• personal income (e.g. selling personal possessions)

If you buy and sell second-hand goods, you should include their value as standard-rated for VAT to get a better estimate.

Is any of this business income exempt from VAT? 

VAT-exempt goods and services differ from zero-rate goods and services, which are taxable for VAT at 0%.

If you answer ‘Yes’ to this question, the VAT Registration Estimator will ask what percentage of this business income is exempt from VAT.

Some examples of goods and services that may be exempt from VAT are:

• granting of loans and credit
• education and vocational training provided by approved organisations
• selling, leasing, and letting of commercial land and buildings (unless you register for VAT and opt to charge VAT on land and buildings)

What rates of VAT does this business income have? 

Choose which of the following rates of VAT apply to the products you sell or provide: standard rate (20%), reduced rate (5%), or zero rate (0%). More than one may apply. 

If any of your supplies are zero-rated or reduced-rate, you must also specify (approximately) what percentage of your business income these VAT rates apply to.

Step 3. Check your answers 

The screen will provide an overview of the questions on business income and how you answered them. 

If you notice any mistakes or want to change anything, select ‘Change’ next to the relevant question to amend your answer. 

When you’re ready to proceed, click ‘Continue’ to go to the next section.

Step 4. Provide information on your business costs

In the second section of the tool, you will answer a series of questions about your business costs. You will be presented with some or all of the following questions:

What are your approximate business costs for this X-month period, including VAT paid?

If you’re using annual accounts to obtain this figure, you should be able to find the relevant information in the profit and loss account. Business costs include:

• purchases of stock and materials
• overhead costs associated with running the business (e.g. rent, utilities, advertising, stationery, and office supplies)
• costs that are out of scope for VAT (e.g. staff wages and directors’ salaries or drawings)

Enter the value of these costs as a whole number of pounds, including any VAT you’ve had to pay on them.

HMRC provides detailed guidance on when you can and cannot claim VAT on business costs.

Approximately what percentage of these business costs are out of scope for VAT?

Some examples of goods and services that are out of scope for VAT are:

• wages, salaries, and directors’ drawings
• business rates and business taxes
• costs that would normally be taxable, but the supplier is not VAT-registered (e.g. repairs by an unregistered contractor)
• voluntary donations you make to charity

If you buy and sell second-hand goods, you should include their value as standard-rated for VAT, to get a better estimate.

Approximately what percentage of these business costs are exempt from VAT? 

VAT-exempt business costs may include:

• bank charges and interest on mortgages or loans
• education and vocational training provided by approved organisations
• buying, leasing, and renting commercial land and buildings (unless your supplier has opted to charge VAT on land and buildings)

Approximately what percentage of these business costs have a zero rate of VAT?

Some examples of zero-rated goods and services are:

• certain food items
• public transport (but not taxis or car hire)
• children’s clothing
• newspapers and books

Approximately what percentage of these business costs have a reduced rate of VAT?

Some examples of reduced-rate goods and services are:

• gas and electricity (if your business is home-based or situated at premises qualifying for the small quantity threshold) – check your bill for the VAT rate you’ve been charged
• installation of energy-saving materials
• children’s car seats

How would you want to account for VAT within your selling prices?

When you register a business for VAT, you can account for VAT in the prices of your goods or services in one of the following ways:

1. Add the VAT due onto your current prices
2. Absorb the VAT into your current prices
3. Absorb some of the VAT into your current prices

The three examples below show how these methods would work in practice.

Adding VAT onto your current price

• You sell a product to your customer for £10, which makes you a profit of £3 on each one you sell.
• When you add the VAT to that price, you still make a profit of £3 on each item that you sell.
• However, your product will now cost the customer:
  • £12 — if the VAT is standard rate (20%) 
  • £10.50 — if the VAT is reduced rate (5%)
• You will also be able to reclaim any VAT you had to pay to make the product (e.g. supplies) and sell the product (e.g. website listing fees).

Absorbing the VAT into your current price

• You sell a product to your customer for £10, which makes you a profit of £3 on each one you sell.
• When you absorb the VAT into that price, your product will still cost the customer £10.
• However, your profit on each item you sell will now be:
  • £1.33 — if the VAT is standard rate
  • £2.52 — if the VAT is reduced rate
• You can also reclaim the VAT you paid to make and sell the product.

Absorbing some of the VAT into your current price

• You sell a product to your customer for £10, which makes you a profit of £3 on each one you sell.
• Let’s say you want to absorb 50% of the VAT on each item you sell. 
• Your profit on each item will now be:
  • £2.17 — if the VAT is standard rate
  • £2.76 — if the VAT is reduced rate
• Your product will now cost the customer:
  • £11 — if the VAT is standard rate
  • £10.25 — if the VAT is reduced rate
• You will also be able to reclaim any VAT you had to pay to make and sell the product.

Step 5. Check your answers 

You will be presented with an overview of the questions on business costs and how you answered them. 

If you notice a mistake or want to change anything, select ‘Change’ next to the relevant question to amend your answer. 

When you’re ready to proceed, click ‘Continue’ to go to the next page.

Step 6. Declaration 

Select ‘Accept and continue’ to declare that you understand the results you are about to view are only an estimate based on the information you provided.

Step 7. View your results

You can now view the results produced by the VAT Registration Estimator tool. The page will tell you whether or not you need to register for VAT, how registration may affect your particular business, and the next steps you can take.

There will be a table showing the difference between your quarterly costs and profits when VAT-registered and not VAT-registered, an estimate of your average quarterly VAT bill, and the price changes for your customer. These figures are based on adding VAT to your current prices.

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You’ll also find a summary of the information you entered, information on VAT record-keeping and reporting requirements, and a comprehensive list of official resources on VAT registration.

The session will end after 15 minutes of inactivity on the page. However, you can save a copy of your results for future reference. This is especially useful when comparing income and costs in different situations.

Do I need to register for VAT?

By law, you must register for VAT with HMRC if any of the following apply:

• your total VAT-taxable turnover for the previous 12 months is more than £90,000 — this is the current VAT threshold applicable from 1 April 2024
• you expect your VAT-taxable turnover to pass the threshold in the next 30 days
• you and your business are based outside the UK, and you supply goods or services to the UK (or expect to do so in the next 30 days) – this applies regardless of VAT-taxable turnover

Your VAT-taxable turnover is the total value of all goods or services you sell that are not exempt from VAT.

If your taxable turnover is under £90,000, you still have the option to register for VAT voluntarily at any time.

Responsibilities as a VAT-registered business

If you register your business for VAT, you will need to:

• charge the correct rate of VAT in the price of the goods or services you sell – this only applies if the goods or services are liable to VAT
• keep VAT records of the VAT you pay on anything you buy for your business
• account for VAT on any goods you import into the UK
• send a VAT Return to HMRC (usually every 3 months) to declare the amount of VAT you charged on sales and the amount you paid to other businesses
• pay any difference in VAT to HMRC – this applies when you receive more VAT on sales than you pay on business purchases

However, if you pay more VAT on your purchases than the amount charged to your customers, you can usually ask HMRC for a VAT repayment. You can claim a repayment on your VAT Return.

Thanks for reading

HMRC’s VAT Registration Estimator is a helpful guidance tool for determining when to register for VAT and whether it’s right for your business. It can also compare different income and cost figures, giving you an idea of how VAT registration may impact your profits in various situations. 

The tool is straightforward to access and use. Just be sure to have all the relevant information before getting started. However, bear in mind that it’s only designed to provide estimates. You shouldn’t use the estimated figures when completing a VAT Return. 

If you require further help with your VAT position, we recommend seeking professional advice from an accountant or tax specialist in the first instance.