VAT has a habit of catching founders off guard — not because it's complicated in principle, but because most businesses don't think about it until they're already inside it. By then, the decisions that would have saved them money have already been made by default.
The VAT threshold trap
The current VAT registration threshold is £90,000 in taxable turnover over a rolling 12-month period. The moment you breach it, you must register — and charge VAT on your sales. For many businesses, this means effectively losing 20% margin overnight if you haven't planned for it.
The mistake founders make: treating the threshold as a cliff edge, rather than a planning trigger. By the time you're at £85,000, you should already have a view on your VAT strategy — not be scrambling to register at £91,000.
Voluntary registration: when it's worth it
You can register for VAT before you hit the threshold. For many businesses, this is actually the smarter move:
- If your customers are VAT-registered businesses — they can reclaim the VAT you charge, so there's no real cost to them, and you get to reclaim VAT on your own purchases immediately
- If you have significant input VAT — high startup costs, equipment purchases, or services from VAT-registered suppliers mean you could be reclaiming more than you're paying out in the early months
- For perception reasons — some founders prefer the optics of being VAT-registered from day one, particularly in B2B markets
The flip side: if your customers are end consumers (not VAT-registered), charging VAT makes you more expensive. Voluntary registration before it's needed can cost you market share.
"The right VAT strategy depends entirely on who your customers are and what your cost base looks like. There is no universal answer — only the right answer for your business."
The schemes most founders don't use
Flat Rate Scheme
If your taxable turnover is below £150,000, you may be eligible for the Flat Rate Scheme. Instead of calculating VAT on every transaction, you pay a fixed percentage of your gross turnover — the rate depends on your industry sector. For some businesses, particularly service businesses with low input VAT, this results in a genuine cash advantage.
Cash Accounting
Under standard VAT accounting, you pay VAT when you invoice — not when you're paid. Cash accounting means you only pay VAT when the money hits your bank account. For businesses with slow-paying clients or long payment terms, this is a significant cash flow benefit.
Annual Accounting
Rather than filing quarterly returns, annual accounting allows you to file a single return each year and make monthly advance payments. For businesses that find quarterly filing disruptive, this can simplify administration — though it's not always the right fit.
The partial exemption trap
If your business makes a mix of VAT-exempt and taxable supplies — common in financial services, insurance, education, and healthcare — partial exemption rules limit how much input VAT you can recover. Getting this wrong leads to either under-claiming (leaving money on the table) or over-claiming (HMRC enquiries). This is an area where the stakes of getting specialist advice are high.
What you should be doing now
If your turnover is between £70,000 and £90,000, you should be modelling your trajectory and making a conscious decision about when and how to register. If you're already VAT-registered and haven't reviewed your scheme in the last year, it's worth a conversation.
VAT planning isn't glamorous, but it's one of the areas where proactive advice genuinely saves money. Talk to a Runway founder about your VAT position — particularly if you're approaching the threshold for the first time.
