The VAT threshold is the minimum amount of money that a business can earn in a year before it is required to pay value-added tax (VAT). In the United Kingdom, the current VAT threshold is £85,000. This means that any business that earns less than £85,000 in a year does not have to charge VAT on its products or services.
The VAT threshold was first introduced in 1973, and it has been raised several times since then. The current rate of 20% was introduced in 1991. The VAT threshold is an important consideration for small businesses, as it can have a significant impact on their bottom line. For businesses that just barely exceed the VAT threshold, charging VAT can eat up a large portion of their profits. As a result, many small businesses choose to remain below the VAT threshold in order to avoid this tax.
However, this decision can limit their growth potential, as they may be unable to invest in new equipment or hire additional staff. Ultimately, each business must decide whether the benefits of charging VAT outweigh the costs
When do I need to register for VAT
In general, you need to register for VAT if your taxable turnover exceeds £85,000. However, there are a few exceptions to this rule. If you are a newly registered business, you may be able to register voluntarily if your estimated taxable turnover is below £85,000. Additionally, some businesses may be required to register for VAT even if their turnover is below £85,000.
Businesses that supply digital services to consumers in other EU countries must register for VAT. As a result, it’s important to speak with an accountant or tax advisor to determine whether you need to register for VAT. Failing to do so could result in significant penalties.
A business may be forced to register for VAT if it takes over an existing business that is VAT-registered. The test is if the taxable turnover of the purchaser for the last 12 months added to the turnover of the business being purchased is over the VAT registration threshold. If the answer is yes, then the business is obliged to register.
Failing to register for VAT on time can result in some serious penalties. Not only will you be charged a late registration fee, but you may also be charged a surcharge and interest on any VAT you owe. In addition, you may be subject to a ‘failure to notify’ penalty if HMRC believes you should have registered earlier.
If your business’ turnover exceeds the VAT threshold temporarily, you can ask HMRC for an exception from registration. However, it’s important to note that this exception does not apply if your turnover exceeds the threshold permanently. As such, it’s always best to err on the side of caution and register for VAT as soon as your turnover becomes liable.
Voluntary VAT registration
Many businesses choose to register for VAT voluntarily, even if their taxable turnover does not exceed the current registration threshold. There are several advantages to this approach. First, it can make your business appear more professional and established. Additionally, it can simplify your accounting and bookkeeping processes.
Finally, it can help you to reclaim any VAT that you have incurred on business expenses. Ultimately, whether or not to register for VAT is a decision that each business owner must make based on their individual circumstances. However, for many businesses, voluntary VAT registration can be a smart choice.
The two reasons why a business might opt to register for VAT are:
- That your customers are predominately VAT-registered businesses is means any VAT they are charged can be recovered, this means your customers can also off set or recover the amount paid.
- The business is always in a refund position with HMRC, so the business will be financially better off being VAT registered.
Who cannot register for VAT?
You cannot be registered for VAT if you do not meet the definition of a business as stated by HMRC for VAT purposes.
Business that are prohibited from registering include ones that only sell goods or services that are exempt from VA
The different VAT rates
The different categories that fall into for VAT purposes:
| Name | Current rate | Description and examples |
|---|---|---|
| Standard | 20% | The standard rate of VAT is the default rate – this is the rate that’s charged on most goods and services in the UK unless they’re specifically identified as being reduced or zero-rated. |
| Reduced | 5% | Domestic fuel and power, installation of energy-saving materials, sanitary hygiene products, children’s car seat, etc. |
| Zero | 0% | Food (not meals in a restaurant or hot takeaways though), books/ newspapers, children’s clothes/ shoes, public transport etc. |
| Exempt | N/a | The law stipulates that VAT exempt goods or services must not have any VAT charged on them. Examples include insurance, providing credit, education, fundraising, membership, etc. |
| Outside the scope | N/a | Items that are completely outside of the UK VAT system. Examples include drawings, wages, MOT tests, rates, etc. |
There are a number of sectors where VAT refunds often occur, Farming is one of these. Farmers make direct purchases from suppliers that are mostly zero-rated and so are their sales. Any VAT they suffer on expenses such as overheads or equipment purchase/hire can be recovered, this is where they will receive a refund.
A few different examples of businesses that may wish to register for VAT voluntarily might include a children’s shoe shop or local corner shop. These types of businesses sales and purchases will generally be zero-rated, Should these incur any overheads such as legal fees or equipment, they should be able to recover any VAT has been suffered when making the purchase.
Choosing a VAT scheme
Now you have established that you will reach the VAT threshold, the next question will be which is the most appropriate VAT scheme for your business.
The three types of VAT schemes are:
VAT flat rate scheme
The value-added tax (VAT) flat-rate scheme is a way for businesses to simplify their VAT affairs. Instead of having to calculate the VAT on each individual sale, businesses can instead pay a flat rate based on their turnover. The scheme is open to all businesses, but there are certain eligibility criteria that must be met. For example, businesses must have a VAT turnover of less than £150,000 per year and must not be registered for VAT on a voluntary basis.
If businesses meet these criteria, they can register for the scheme by contacting HM Revenue & Customs (HMRC). Once registered, businesses will need to file a quarterly return detailing their turnover and the amount of VAT paid. Returns can be filed online, by post or through an accountant. The main advantage of the flat-rate scheme is that it saves businesses time and money by reducing the need for complex calculations. However, businesses should be aware that they may end up paying more VAT overall if their turnover is high. For this reason, it’s important to consider whether the flat-rate scheme is right for your business before registering.
Find out how to use the Flat Rate Scheme, who can use it and how to apply to join the scheme here
VAT cash accounting scheme
The VAT cash accounting scheme is a system designed to simplify the process of collecting and paying value-added tax (VAT). Under this scheme, businesses are only required to pay VAT on the money they have actually received from customers, rather than the total value of sales. This can make it much easier for small businesses to manage their VAT liabilities, as they will not need to front the full amount of VAT owed each quarter.
The scheme is administered by HM Revenue & Customs (HMRC), and businesses can apply to join at any time. There are a few eligibility requirements, but the main one is that businesses must have an annual turnover of less than £1.35 million. If you think the VAT cash accounting scheme could benefit your business, then contact HMRC for more information.
The cash accounting scheme cannot be used in conjunction with the VAT flat rate scheme.
Annual accounting scheme
If you’re self-employed or run a small business, you may be able to use the Annual Accounting Scheme to pay your VAT. This scheme can make it easier to budget for your VAT payments as you only make one payment a year, and you don’t have to submit regular VAT returns. However, there are some restrictions on who can use the scheme, and you’ll need to meet certain criteria in order to qualify.
If you think the Annual Accounting Scheme could be right for you, contact HMRC for more information.
No you are aware of when you need to register for VAT, check out part two of this guide: How to register for VAT
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