Understanding VAT Thresholds: When Do You Need to Register?
Posted 2 weeks ago by Alison
Introduced in 1973, VAT, or Value Added Tax, is a tax added to most goods and services sold in the UK. It is levied at each stage of the supply chain, from production to final sale. Businesses registered for VAT must charge it on the goods and services they supply and pay the VAT they have charged to HM Revenue & Customs (HMRC). They can also claim back any VAT they have paid on their business expenses. Standard rate VAT, which applies to most goods and services, is currently 20%.
Not all businesses have to pay VAT, so awareness of VAT thresholds is essential. Once a business's turnover exceeds these thresholds, they must register to pay VAT. Failing to do so, or late registration, means you'll have to pay VAT to HMRC even though you won't have been charging it to your customers, potentially leaving you seriously out of pocket. You could even end up having to pay an additional fine or a civil evasion penalty.
In this article, we'll explain what the VAT threshold and deregistration threshold are, what they mean for your business, when and how to register for VAT and which scheme to opt for, as well as explain how to manage VAT in your accounting software.
1. VAT Thresholds: The Basics
The VAT threshold is the sales limit that determines whether a business is required to register for VAT with HMRC. It is measured on the taxable turnover of the previous 12 months, which is the total amount of revenue generated by your business that is not exempt from VAT. The VAT threshold currently stands at £90,000, meaning businesses with a taxable turnover of less than £90,000 are not required to register for VAT.
So, what counts as taxable turnover? The total value of everything you sell that's not exempt from VAT or 'out of scope'. This includes zero-rated goods, reduced-rated and standard-rated goods, goods you hired or loaned to customers, business goods used for personal reasons, and services you received from businesses in other countries that you had to reverse charge.
There are, however, several income streams that don't count towards the VAT threshold, most notably any income that is exempt from the tax. This could include income from financial services or selling insurance; rental income from properties or the sale of land or existing buildings; and income from betting, gaming or lotteries.
A business also does not need to include any income outside VAT's scope. This includes supplies of goods or services outside the scope of UK VAT due to place of supply rules, which means that if the place of supply is outside the UK, the sale may not count towards a business's taxable turnover for VAT registration purposes.
One-off sales of capital assets also won't count towards the VAT threshold, so if, for example, a business sells a vehicle that puts its turnover over the registration threshold, the sale proceeds can be ignored.
Despite the VAT threshold being raised by £5,000 this year, many small businesses will still have to pay VAT, so monitoring your turnover regularly is essential. By doing so, you can be sure you'll register on time and avoid being hit by a penalty.
2. When to Register for VAT
By law, your business must register for VAT with HMRC if your taxable supplies have exceeded the VAT registration threshold over the past 12 months. This is the case regardless of your business structure, so sole traders, limited companies, and limited partnerships must all register.
It's worth noting that this calculation should take place on a rolling 12-month basis; it's not based on the tax year, your last financial year or the calendar year. If the total of your turnover over the past 12 months exceeds £90,000 at any point, you'll need to register for VAT.
While breaching the threshold means you must register for VAT, it is also possible to do so voluntarily. There are several reasons why this could make sense for a small business. For example, being VAT registered means you can reclaim VAT on most goods or services purchased from other companies; you may also be able to backdate the registration by up to four years if sufficient evidence can be supplied to HMRC. This means a business may be able to reclaim VAT paid on equipment that it is still using. However, VAT could hamper the appeal of goods and services to customers who are not VAT registered, and being VAT registered inevitably means more admin and paperwork – maintaining VAT accounting records and filing quarterly returns, for example – so be sure to research what will be best for your business before committing.
If you choose not to register voluntarily, it's important to keep an eye on your turnover so you can be aware of any upcoming threshold breaches. If you do reach the threshold, you must register for VAT within 30 days of the end of the month in which you exceed the threshold. So, if the threshold was breached on 31 October, you must register for VAT by 30 November. This time limit is another reason why it's essential to monitor your turnover on a monthly basis, particularly as you approach that all-important £90,000 mark.
3. What Happens Once I Meet the VAT Threshold?
While the thought of meeting the VAT threshold might be daunting, the good news is that registering for VAT in the UK and Northern Ireland is relatively quick and straightforward.
Read more: How to Register for VAT in the UK
The easiest way to register is online via www.gov.uk. You'll need basic information including your company registration number, bank account details and unique taxpayer reference. Once you've submitted all the necessary information, you'll receive a 9-digit VAT registration number, which you must include on all invoices you raise, which will be posted to you, usually within 14 days.
Once registered, you must ensure the business complies with all relevant UK tax regulations, including generating VAT invoices, submitting VAT returns, and keeping accurate business records, such as invoices and receipts, for a minimum of six years.
VAT must be charged on any goods or services you supply, which involves calculating the VAT-inclusive price using the correct rate, displaying VAT details on your invoice—including your VAT number and separating the VAT amount—and recording the transaction in your VAT account. Finally, ensure the amount is reflected on your VAT return.
Regular VAT returns must be submitted, with the frequency depending on the scheme selected. Submission must be completed using Making Tax Digital-compliant accounting software, such as AccountsPortal, as online account submissions are no longer accepted.
You'll need to supply your total sales, output VAT (the VAT collected on your sales), total purchases and input VAT (the VAT you can claim back) for the period in question. If you're selling more than you buy, you'll end up with a bill to pay – this must be settled within a month and seven days to avoid any penalties. If you paid more VAT than you've collected, HMRC will refund you the difference. Payments can be made by direct debit, via online banking or on a debit or corporate credit card.
4. What Happens if My Business is Temporarily Over the VAT Threshold?
Of course, many businesses have seasonal or project-based fluctuations in their income, so it may be the case that you meet the VAT threshold only on an ad-hoc or temporary basis. Again, keeping track of your turnover is vital to prepare for this. While you may decide to register for VAT in this situation, another option is to apply for an exception from registration if this is due to a temporary spike in turnover. To do this, contact HMRC to request a VAT1 registration form.
You'll also need to provide evidence showing why you believe your taxable turnover will not go over the deregistration threshold of £88,000 in the next 12 months. HMRC will consider your exception and write to confirm your application's success. If not, they'll register you for VAT. It's important to note that even if you think you will be exempt from paying VAT, it's essential that you inform HMRC if you exceed the VAT threshold.
Failure to notify leaves open a liability to be registered for VAT going back up to 20 years.
5. VAT Schemes and Their Thresholds
There are a number of different VAT schemes to choose from depending on your business needs, although some have specific eligibility conditions, and rules and reporting requirements can vary. The most common ones include:
5.1 Flat Rate VAT Scheme
Designed to make VAT accounting in the UK and Northern Ireland simpler, with the Flat Rate VAT Scheme, businesses pay a fixed rate of VAT based on their business type – you can check the rate for your business on the HMRC site - you then keep the difference between what you charge your customers and what you pay to HMRC. However, it is not possible to reclaim the VAT on purchases - except for certain capital assets over £2,000. To join the Flat Rate VAT Scheme, VAT turnover must be £150,000 or less (excluding VAT).
The key benefit of this scheme is its simplicity for businesses, as it's no longer necessary to work out how much VAT you can claim back on purchases. Also, depending on the flat rate assigned to your business, there could be a cash flow advantage. As the flat rate could be as low as 4% and the standard VAT is 20%, it is possible to make money from the scheme.
5.2 VAT Cash Accounting Scheme
Usually, the amount of VAT a business pays is the difference between sales invoices and purchase invoices. You must report these figures and pay any money to HMRC even if the invoices have not been paid. With the VAT Cash Accounting Scheme, however, VAT is paid on your sales when customers pay, and you can reclaim it on purchases when you have paid your supplier. That means a business can pay VAT based on the cash it's actually received, rather than on what has been invoiced, which can positively impact cash flow.
To join the Cash Accounting Scheme, VAT taxable turnover must be £1.35 million or less, and it is only possible to stay in the scheme if turnover remains below £1.6 million.
5.3 Annual Accounting Scheme VAT Threshold
Another popular option is the Annual Accounting Scheme. With this option, businesses make quarterly or monthly payments towards their annual VAT bill but only submit one VAT return per year instead of doing so quarterly. After you've submitted your annual return, you can either make a final payment – the difference between your advance payments and the actual VAT bill – or apply for a refund if you've overpaid throughout the year. You can join the scheme if your estimated VAT taxable turnover is £1.35 million or less.
This scheme can offer several benefits, including streamlining paperwork, removing the burden of submitting quarterly VAT returns, and encouraging effective cash flow management by making regular payments throughout the year. However, it may not be suitable for all businesses. For example, companies that regularly reclaim VAT may find the scheme unsuitable, as they are restricted to claiming refunds on an annual basis. Also, payments may be higher than necessary as they are based on previous years' performance, which can negatively impact cash flow.
Read more: Guide to VAT Accounting Schemes
6. VAT Deregistration Threshold
While businesses must register for VAT when they meet the necessary criteria, it is also possible that they may need to deregister. There could be several reasons for this, including if turnover falls below the £88,000 deregistration limit or if a business stops selling goods or services that are VAT taxable. In addition, if a company ceases trading or changes business activities, they must inform HMRC and can apply to deregister. Similarly, owners can cancel their VAT registration if a business is sold. However, if the new owner wants to retain the same VAT registration number, the old owner must specify this in the application to deregister. This enables the new owner to seek a transfer of VAT registration from HMRC.
Also, if a business changes its structure from solе trader to a partnеrship or limitеd company, they must apply for deregistration. If the business wishes to retain an existing VAT number, they must request a transfer of a going concern. If not, a 'change of legal entity' can be requested.
In most situations, it is possible to deregister via your Government Gateway account by clicking on the 'deregister for VAT' option. You'll need to supply information such as your VAT rеgistration numbеr, principal trading address, rеason for dеrеgistration and contact details.
If, however, you're looking to deregister because the business' legal status has changed and you want a new VAT registration number, you've sold your business and the owner is not keeping the VAT registration number, or your business stopped trading after liquidation you need to cancel your registration by post using form VAT7, which needs to be completed online, printed and posted to HMRC.
It usually takes three weeks for HMRC to confirm your cancellation and provide the official cancellation date. You must continue to charge VAT until the official cancellation date, and you'll need to keep all VAT records for 6 years.
HMRC will automatically re-register you if they realise you should not have cancelled, and you'll have to account for any VAT you should have paid in the meantime.
Once deregistered, you'll no longer be able to charge VAT on your sales. While this could make your products or services cheaper for customers who are not VAT-registered, it also means you cannot reclaim VAT on your business purchases, potentially increasing your costs. For this reason, deregistering can be a good time to reassess your pricing strategy and positioning in the market. Also, if you frequently reclaimed more VAT than you were paying, VAT deregistration could affect your overall profitability. Again, sound financial planning is needed to mitigate this.
7. Special Considerations
VAT can be complex, and a few special considerations shouldn't be overlooked. For example, VAT place of supply rules dictates that if you are a business making digital services for UK consumers, those supplies are liable to UK VAT. If you supply digital services to consumers outside the UK, these are not liable to UK VAT, although they may be liable to VAT in the country where the consumer is based. If you supply digital services to consumers via a third-party platform or marketplace, the digital platform is responsible for accounting for VAT on the supply instead of you.
If your supplies are liable to UK VAT, you must register even if you're based outside the UK. Similarly, UK businesses supplying digital services to consumers in the EU must either register for the Non-Union VAT MOSS scheme in an EU member state or register for VAT in each EU member state where you supply digital services to consumers.
The Northern Ireland Protocol means that Northern Ireland maintains alignment with EU VAT rules for goods, including on goods moving to, from and within Northern Ireland. However, Northern Ireland remains part of the UK's VAT system, and the VAT registration threshold is £90,000.
Northern Ireland also adheres to the distance selling threshold, so if the total value of goods you've sold from Northern Ireland to customers in the EU is more than £8,818, you must pay VAT in the countries the goods are sent to. Again, this can be done via the VAT One Stop Shop (OSS) union scheme or in each country where you're supplying goods.
If you're based in Northern Ireland and sell goods or services that are VAT exempt, you'll need to register if you only sell VAT exempt or 'out of scope' goods and services, but you buy goods for more than £90,000 in any 12 months from EU VAT-registered suppliers to use in your business.
8. Managing VAT with AccountsPortal
Once registered for VAT, you must maintain accurate records and fulfil the associated reporting requirements at the right time. AccountsPortal has several features that can ensure this is a swift and smooth process.
Whatever your VAT scenario – Standard, Flat Rate, EU Digital Services, VAT MOSS and more – AccountsPortal ensures you can easily handle VAT accounting, creating VAT reports in seconds. Reports are formatted so that filling in a VAT return is a simple task and they are automatically customised depending on your location, with automatic submission to HMRC for UK customers via Making Tax Digital.
Simple dashboards enable users to quickly see VAT inputs and outputs so it's clear what you owe HMRC or what you can reclaim. Users will also have access to VAT accounting and main accounts in the same place for added clarity.
Setting your tax status, generating and viewing VAT reports, submitting returns, and more can be done with a matter of clicks with AccountsPortal. An organisation's tax status or VAT rates can be amended via Settings > Tax Settings > Tax Status. You can also change your accounting basis to accrual or cash and amend your reporting frequency, choosing monthly, two monthly, quarterly or annually. Choose the date the changes apply, and your tax status will be updated accordingly.
By clicking on Tax Rates in this section, it is possible to add or amend tax rates and add domestic reverse charge tax rates. AccountsPortal automatically provides the VAT rates that are necessary in most countries. If the rates don't meet your requirements, you can edit the existing rates and create new ones.
To generate and view VAT reports, click the Reports tab and scroll down to Tax Reports. Here you can create and save VAT reports for submission and report VAT on Digital Services into the EU.
You can start a new VAT report or view or delete an existing one by clicking on the VAT Report heading. Clicking the 'File with HMRC' button will submit a return via Making Tax Digital directly to HMRC. Confirmation messages will appear below the VAT report, indicating the current status of the submission.
Key Takeaways for Managing VAT Successfully
VAT can be a complex and costly area of tax if not managed correctly. Maintaining and monitoring accurate accounts is essential to ensure you're aware of when you need to register for VAT, that you're on the best scheme for your business, and to take the stress out of submitting returns to HMRC.
Keeping up to date with any changes in regulations is equally essential, particularly when it comes to registration thresholds. Not registering for VAT can mean a hefty fine, while being on a scheme that doesn't suit your business can impact cash flow and profitability. Seeking professional advice to ensure you're meeting your legal requirements and operating as efficiently as possible is a wise option. It should undoubtedly be pursued if you're not clear on any area of tax and accounting.
Further Reading
Spring Statement 2022: What it means for small businesses
How to manage the final hospitality VAT rate increase in AccountsPortal