It is compulsory for a company to register for VAT if their sales have exceeded £83,000 in the last 12 months, or if you expect to increase this threshold in the next 30 days.
Contractors have a choice of using standard VAT reporting or a simplified Flat Rate Scheme (FRS) reporting option, if they qualify. New contractors can voluntarily register for VAT and report using the Flat Rate Scheme (FRS) – this is particularly beneficial if you are not expecting to exceed the £85,000 threshold, as it allows a reduction of 1% on the FRS rate to apply in the first year of trading.
HMRC have very strict penalty regimes and will apply a percentage of the 'potential lost revenue' for failing to register for VAT if required to do so. This can range from 30% to 100% in cases of deliberate and concealed failure to notify.