Advanced Taxation (UK) · Tax advantages and disadvantages of alternative courses of action

VAT Registration, Deregistration and Late Payment Penalties

Updated 11 October 2026 · Fact-checked

In ATX-UK you use the VAT limits and penalty table to compare choices. The registration limit is £90,000 and the deregistration limit is £88,000. Late payment penalties are 3% for 16 to 30 days and 6% plus a daily charge beyond 30 days. You compare VAT cost with VAT recovered.

Understand VAT Registration, Deregistration and Penalties

VAT is a tax on supplies made by VAT-registered businesses. Once you are registered, you charge output VAT on taxable supplies and you can usually reclaim input VAT on costs. The standard rate is 20%.

A business must register when its taxable turnover goes over the registration limit of £90,000. It may leave the register when turnover is expected to fall to or below the deregistration limit of £88,000. The two limits differ by £2,000 so that a business near the line does not flip in and out. Only the figures in the tax tables are given to you. You must know the surrounding rules, such as the time tests, from your TX-UK knowledge.

The key planning question is who your customers are. If customers are VAT-registered businesses, they can reclaim the VAT you charge. Registration costs them nothing in real terms. If customers are private individuals, or make exempt supplies, they cannot reclaim it. Then registration either cuts your margin or forces a price rise. Voluntary registration can help if you make zero-rated supplies or have large VAT-bearing costs. It gives you a refund of input VAT. Exempt supplies are different: you cannot reclaim input VAT on costs linked to them.

Penalties matter for cash and compliance. A VAT payment up to 15 days late has no penalty. At 16 to 30 days it is 3%. After 30 days it is 6% plus a daily penalty at an annual rate of 10%. Exam answers compare the tax saved by a choice with the penalty or cost of getting it wrong. Always state the assumption you use, such as who the customers are.

Key rules to remember

Standard rate of VAT: VAT = net amount × 20%; gross = net × 1.20; To get VAT from a VAT-inclusive price, use gross × 20/120 (1/6).
Registration limit: Taxable turnover above £90,000 → registration required; The figure is given in the tax tables. Know the time tests from TX-UK.
Deregistration limit: Expected taxable turnover not above £88,000 → may deregister; Given in the tax tables. Consider the cost of leaving, such as VAT on assets held.
Late payment penalty: up to 15 days: No penalty; Applies to VAT paid up to 15 days late.
Late payment penalty: 16 to 30 days: 3% of the VAT unpaid; Applies to VAT 16 to 30 days late.
Late payment penalty: over 30 days: 6% plus a daily penalty at an annual rate of 10%; Both parts are charged on the unpaid VAT.

How to solve VAT Registration, Deregistration and Penalties questions

Use this method for any question comparing VAT registration, deregistration or penalty outcomes.

1Read the requirement. Decide if it asks whether to register, deregister, or the cost of late payment.
2Identify the supplies: standard-rated, zero-rated, exempt or outside the scope. This decides input VAT recovery.
3Identify the customers. Are they VAT-registered businesses or not? This decides whether VAT is a real cost.
4Compare turnover with the £90,000 registration limit or £88,000 deregistration limit from the tax tables.
5Quantify both options: output VAT payable, input VAT recovered, effect on prices and net profit.
6Where penalties apply, use the days late to pick the correct rate from the table and compute it.
7State a clear recommendation with the key assumption, and note non-tax points such as admin and cash flow.

Quickest way: Compare net VAT cash with and without registration

When to use it: Use when a question gives turnover figures and asks if registration is worth it.

Compute output VAT: standard-rated sales × 20%, or ÷6 if prices are VAT-inclusive.
Compute recoverable input VAT on costs for taxable supplies.
Net VAT = output minus input. Positive is a cost; negative is a refund.
If customers cannot reclaim VAT, treat the net VAT as a lost margin or a price rise.
Write the recommendation in one sentence, then list the assumption.

Common mistakes in VAT Registration, Deregistration and Penalties

Adding 20% to a VAT-inclusive figure
Students do not check whether the price already includes VAT.
Fix: If the price includes VAT, VAT is price × 20/120. Underline 'inclusive' or 'exclusive' in the question.
Treating exempt and zero-rated supplies as the same
Both charge no VAT to the customer.
Fix: Zero-rated supplies are taxable at 0%, so input VAT is recoverable. Exempt supplies are not taxable, so related input VAT is generally not recoverable.
Ignoring who the customers are
Students compute the VAT but not who bears it.
Fix: Always say whether customers can reclaim VAT. This usually drives the recommendation.
Using the wrong penalty band
Students mix up the day thresholds.
Fix: Count the days late. None up to 15 days, 3% for 16 to 30 days, and 6% plus a daily charge for over 30 days.
Mixing up the registration and deregistration limits
The figures are close.
Fix: Registration is £90,000. Deregistration is £88,000. Write both beside your answer.
Giving a computation with no recommendation
Students focus on the numbers.
Fix: Finish with a clear conclusion and a sentence on the assumptions and non-tax factors. These earn professional skills marks.

Worked examples

Example 1

Amy's taxable supplies are all standard-rated and made to private customers. Her annual sales are £84,000 including any VAT she would have to account for, and her costs of £20,000 are VAT-exclusive and bear VAT at 20%. She is considering voluntary registration. Prices cannot be raised. Advise on the annual effect.

Show the solution

Unregistered position: she charges no VAT and cannot reclaim input VAT. Her costs are £20,000 + VAT of £4,000 (£20,000 × 20%) = £24,000. Profit before other costs = £84,000 − £24,000 = £60,000.
Registered position, output VAT: prices cannot be raised, so the £84,000 customers pay is VAT-inclusive. VAT = £84,000 × 20/120 = £14,000.
Net sales after VAT = £84,000 − £14,000 = £70,000.
Input VAT recovered = £20,000 × 20% = £4,000, so her costs are effectively £20,000. Profit before other costs = £70,000 − £20,000 = £50,000.
Net VAT payable to HMRC = £14,000 − £4,000 = £10,000. This matches the fall in profit: £60,000 − £50,000 = £10,000 a year.
Her turnover is below £90,000, so registration is not compulsory.

Answer: Registration would cost Amy £10,000 a year (profit before other costs of £50,000 against £60,000 if unregistered), as customers cannot reclaim VAT and she cannot raise prices. She should not register voluntarily.

Example 2

A company pays a VAT liability of £40,000 on a date 20 days after the due date. A second company pays a VAT liability of £40,000 which is 45 days late. Using the penalty table, state the penalty on the first and how the second is charged.

Show the solution

First company: 20 days late falls within 16 to 30 days.
Penalty = 3% × £40,000 = £1,200.
Second company: 45 days late is more than 30 days.
The penalty is 6% × £40,000 = £2,400, plus a daily penalty at an annual rate of 10% on the unpaid VAT.
The daily element depends on the number of days the VAT remains unpaid, so it is stated as a rate in the answer.

Answer: First company: £1,200. Second company: £2,400 plus a daily penalty at an annual rate of 10% of the unpaid VAT.

Exam tips

Write the limits £90,000 and £88,000 at the top of your answer so you do not mix them up.
Always state who the customers are and whether they can reclaim VAT. Markers look for this commercial point.
When comparing options, show output VAT, input VAT and the net figure in a clear layout.
Check whether prices are VAT-inclusive or exclusive before any calculation.
End with a reasoned recommendation that mentions assumptions, cash flow and administration.

Practice questions from Tax advantages and disadvantages of alternative courses of action

VAT Registration, Deregistration and Penalties in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Applied SkillsDeregistration from VAT

VAT Registration, Deregistration and Penalties: frequently asked questions

What is the VAT registration limit in ATX-UK?

It is £90,000 of taxable turnover, as given in the tax tables for the June 2026 to June 2027 exams. You still need to apply the time tests you know from TX-UK.

What is the VAT deregistration limit?

It is £88,000. A business may deregister when its expected taxable turnover is not above this figure. You should also consider the cost of leaving, such as VAT on assets held.

How are VAT late payment penalties calculated?

There is no penalty up to 15 days late. For 16 to 30 days it is 3%. Over 30 days it is 6% plus a daily penalty at an annual rate of 10%.

Should a business with exempt supplies register?

A business making only exempt supplies cannot register for VAT, because exempt supplies are not taxable supplies. Input VAT linked to them is generally not recoverable. Zero-rated supplies are taxable at 0%, so registering can give a refund of input VAT.