VAT is a very complicated area and I would recommend that you seek advice either from Holgate Court Accountants or the HMRC website/helpline.
Let’s assume you run a “normal” business, i.e. your product/service is standard rated for VAT. You must register for VAT when your turnover (that is sales, not profit) reaches the VAT registration threshold, currently £77,000, but it changes every year. You have to add up the value of your sales each month and if you reach the registration threshold within a 12 month period then you have to register. It is a rolling 12 month period, so you add month 1, then month 2 etc… when you get to month 13, you drop off month 1, so it’s always 12 month of turnover you are looking at.
If you reach the turnover limit in June 2016 then you have to apply to register in July 2016 and you would charge VAT from August 2016. If you register late, then you will be charged interest and penalties in addition to paying HMRC the VAT you should have charged your customers.
You then need to decide whether to use the standard method or the cash method to calculate your VAT. You may be eligible to register for the flat rate scheme and for some businesses that may be worthwhile.
Once registered you then usually submit VAT Returns each quarter and make a payment or claim a repayment as appropriate. There are penalties/surcharges if you either submit your VAT Return late, or make the payment late. HMRC take the view that the VAT you charge was never yours and so when you collected it from your customer, you shouldn’t have spent it in your business. Therefore, you should be able to pay it to them on time. If only real life was that simple!
As usual your business records are open to inspection by HMRC and you must have receipts for all goods/services you have claimed input VAT on.