- You can apply for exception from VAT registration if past taxable sales exceeded £90,000 temporarily.
- You must prove that future sales over the next 12 months will stay below £88,000.
- The process requires paper forms VAT1 and VAT5EXC submitted together by post.
Small UK firms can apply for exception from VAT registration when sales spike for a short time. Did your sales cross £90,000 this month? You might not need to register. Under official HMRC exception guidance, you must show one key fact. You must show that sales will drop below £88,000 over the next 12 months. This relief helps sole traders and small firms avoid extra tax tasks.
Registering adds ongoing compliance overhead. Under standard VAT accounting you would typically file quarterly returns. You must buy software and keep digital files. Prices may also go up for non-VAT buyers. If you sell to the general public, adding 20 percent can hurt sales. An exception stops these problems.
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Two clear tests you must meet
The law for this rule sits in the Value Added Tax Act 1994. Under Schedule 1, HMRC can drop the need to register. But you must meet two tests at month end.
First, past sales must be over £90,000. Look back at the last 12 months. Add up all taxable income. Second, look ahead at the next 12 months. You must prove your future sales will stay below £88,000. If future sales will hit £88,000 or more, HMRC will say no.
Do not wait too long. You have 30 days from the end of the breach month to tell HMRC. If you miss this date, you could face fines.
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Exception versus exemption
Do not mix up exception with exemption. They sound alike, but they are not the same.
Exemption depends on what you sell. Health care and education do not carry VAT. Land rent and loan interest are also exempt. If you sell only exempt goods, you never register. Your sales volume does not matter.
An exception is different. You sell goods that have VAT. You went over the limit by accident. You ask HMRC to let you off because sales will drop soon. The table below shows the main contrasts:
| Point | Exception | Exemption |
|---|---|---|
| Law | Schedule 1 VATA 1994 | Schedule 9 VATA 1994 |
| Goods | Taxable goods and services | Exempt items by law |
| Turnover | Past sales over £90k, future under £88k | Sales volume does not matter |
| Time | Short term only | Long term status |
| Forms | Forms VAT1 and VAT5EXC | No application needed — status follows supplies |
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How to send your forms to HMRC
You cannot do this online. You must use paper forms.
Call HMRC on the phone first. Tell them your sales went over £90,000 for a short time. Ask for form VAT1 and form VAT5EXC. They will post both paper forms to your door.
When completing form VAT1, follow the form instructions to indicate you apply for an exception rather than standard registration. Then fill in form VAT5EXC. Write down why your sales went up. Under official HMRC internal manual VATREG19250, you must post both forms together in one envelope.
Include good proof in your pack:
- List sales for each of the last 12 months.
- Add a 12-month sales forecast showing totals below £88,000.
- Send copies of one-off invoices that caused the spike.
- Add letters showing big contracts have now ended.
The table below illustrates a typical 12-month forward projection schedule where abnormal contract revenue drops off:
| Forecast Period | Projected Monthly Sales | Rolling 12-Month Total | Threshold Status |
|---|---|---|---|
| Months 1 to 3 | £6,200 / month | £18,600 | Baseline trading |
| Months 4 to 6 | £6,500 / month | £38,100 | Normal client retainers |
| Months 7 to 9 | £6,000 / month | £56,100 | No seasonal spikes |
| Months 10 to 12 | £6,400 / month | £75,300 | Well below £88,000 limit |
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Trading while you wait for HMRC
HMRC takes up to 40 working days to reply. What should you do while you wait?
You cannot issue a VAT invoice yet because you have no VAT registration number. However, if HMRC refuses your exception, they will register your business from the date liability arose under official GOV.UK guidance. That means you will owe VAT on all sales made during the waiting period.
If you sell to other firms, talk to them early. Tell them you have applied for an exception. Add a clause to commercial contracts allowing you to issue a supplementary VAT invoice later if needed. If you sell to consumers, set aside 20 percent of your takings into a separate reserve bank account so you have ready funds if HMRC refuses the request.
If HMRC agrees, they send a formal approval letter confirming you need not register. If they say no, they use form VAT1 to register your firm and backdate liability to your effective date of registration.
Rules you must follow each month
An exception is not a permanent pass. Under HMRC internal manual VATREG19200, you must keep watching your sales.
Check your total sales at the end of each month. Add up the last 12 months again. If sales cross £90,000 again, you have a fresh duty to act. You must either register or send a new application.
Stay alert. If sales stay high and you do not tell HMRC, they will charge penalties. Keep neat monthly records to stay on the safe side.
Frequently Asked Questions
What is the difference between VAT exception and VAT exemption?
Exemption is statutory. In contrast, an exception applies when a business temporarily exceeds the threshold.
How long does HMRC take to review an exception form?
HMRC aims to write back with an answer within 40 working days.
Which forms do you need to send to HMRC?
You need paper forms VAT1 and VAT5EXC sent together by post.