The simple answer is that you will need to register for VAT once your turnover exceed, or is expected to exceed, £85,000 (in 2021) over any 12 month period.
But, as with most tax questions, the answer is more complex as there are exceptions to this, and also circumstances when you might choose to register voluntarily even if you have not yet reached this limit.
What is the relevant turnover?
Turnover is the income from all the goods/services that fall under the scope of VAT.
Some items are exempt from VAT such as insurance, postage stamps or services, and health services provided by doctors
Some items are outside the scope of VAT such as goods or services you buy and use outside the UK, statutory fees like Companies House fees, and donations to charities
Pretty much everything else is subject to VAT so you should include this in your calculation.
The 12 month period is a rolling time frame i.e. looking back 12 months from today rather than you your accounting year or a tax year. This is why you can not rely on your accountant to spot the need to register if we are only preparing your accounts once a year.
If you take over a VAT registered business you will probably need to register too.
My income is already over £85,000 what should I do?
You have 30 days to register. After this date you are liable for all the VAT due as if you had been registered, whether or not you are able to recover this from your customers.
Why would I choose to register voluntarily?
If you sell a lot of good that are zero rated for VAT or exports then you may not need to charge VAT but you can still reclaim the VAT on things that you buy. This will effectively reduce your costs by the VAT amount.
If you sell mainly to VAT registered businesses then charging VAT on your sales will not be an issue as your customers will be able to reclaim it. This means that you can then reclaim the VAT on things that you buy.
If you sell mainly to non-VAT registered individuals then adding VAT to your fees would feel like a 20% increase to them OR you would have to reduce your current prices to absorb some or all of the VAT and effectively reduce you own profitability. We would not recommend registering voluntarily in this situation unless you have particularly high VATable costs.
As you can see the decision of whether to register for VAT or not is not a simple issue and we are, as usual, here to help you to decide what is best for your business.