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There is a VAT threshold for every small business that is set by HMRC and can vary. Once taxable income exceeds the value set for any given financial year, businesses must register for VAT. Failure to comply and register could attract serious penalties. The VAT threshold is currently £85,000 until March 2024.

What is the VAT threshold for small businesses? What is VAT? How do you calculate the total annual VAT taxable turnover? What are the best ways for small businesses to keep track of their expenses to stay below the threshold?

Every business owner must have a perfect answer to these questions to avoid VAT compliance issues.

Read on for more information about the VAT threshold for a small business.

What Is VAT?

Value Added Tax (VAT) is a type of consumption tax applied to almost all goods and services in the UK. In simple terms, it is the customers that pay this additional fee and not the business. Customers pay VATs when purchasing certain items and the HMRC mandates the business to remit the VAT to them.

What Is The Purpose Of The VAT Threshold?

The purpose of the VAT threshold is to protect smaller businesses from the administrative responsibility of paying taxes on incomes they have not received. Only businesses with an expected turnover are required to pay Value Added Tax (VAT).

The objective is to ensure that the small business is not at the disadvantage of the bigger companies capable of absorbing high taxation costs. Similarly, small enterprises can run business without the challenge of passing on additional taxation to their customers. It helps growing firms to remain competitive with fair prices that do not hinder their development.

How To Calculate Total Annual VAT Taxable Turnover

The total annual VAT taxable turnover is the overall value of taxable goods and services sold by a business in one financial year. A typical financial year in the UK is from April to March of the following year. To calculate the total annual VAT taxable turnover, we add the total sales (excluding VAT) for all products and services sold by the business for a defined 12-month period.

For example, consider a company that sold £80,000 worth of products over a 12-month financial year, and another £5,000 worth of services (excluding VAT). The total VAT taxable turnover would be £80,000 + £5,000 = £85,000.

The calculated total annual VAT taxable turnover amount is then compared to the current VAT threshold set by the government. Any business that obtains a value greater than the threshold must register immediately for VAT and include the extra charge on applicable goods and services.

Every VAT-registered business needs to maintain accurate records of all its taxable sales, including those that do not exceed the threshold. The record details become necessary when the HMRC checks their taxable returns to calculate their VAT liability.

Who Needs To Register For VAT?

Register your company for VAT if the business satisfies any of the following conditions:

  • The total VAT taxable turnover exceeded £85,000 within the last 12 months
  • Your business financial records indicate that the turnover will exceed £85,000 within the next 30 days

Additionally, businesses that provide goods and services to customers residing in the UK, or who plan to sell to UK residents within the next 30 days must register for VAT even if the turnover does not exceed the threshold.

Finally, certain sectors in the UK are expected to always register for VAT irrespective of their turnovers. They include motor traders and insurance companies.

Who Doesn’t Need To Register For VAT?

With the definitions and exceptions for businesses that exceed taxable turnovers, who does not need to register for VAT?

Businesses with a turnover below the VAT threshold do not need to register for VAT. They are allowed to keep trading without VAT registrations although they may qualify for a few benefits should they decide to voluntarily register.

Those benefits include the ability to offset input taxes on purchases against their output tax payable. However, that is only possible after weighing it up against the extra cost and administrative responsibility of filing returns to the HMRC.

Any business with all its items exempted from VAT does not have to register for it. Check out the list of some goods and services that fall in this category. You can confirm on the HMRC website here.

  • Financial services, investments and insurance
  • Garages, parking spaces and houseboat moorings
  • Property, land and building agencies
  • Education and training services
  • Healthcare and medical treatment
  • Funeral plans, burial or cremation services
  • Charity events
  • Antiques
  • Gambling or lottery tickets
  • Sports activities

What Are The Benefits Of Being VAT Registered?

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Learn about the following advantages of registering your company for VAT in the UK.

  • Access to the Flat Rate Scheme – Businesses that are eligible and apply for the flat rate scheme only pay a fixed VAT rate to the HMRC and get to keep the difference. It could be a strategy to save business money and ease the accounting and tax returns process.
  • Increased credibility – some customers have more confidence in VAT-registered businesses including some high-paying clients
  • Possibility to reclaim VAT on purchases made for business – this holds for VAT-registered businesses except the ones on the flat rate scheme. However, there are a few exceptions for
  • Access to HMRC records – access to these records can facilitate tax booking and periodic compliance checks. It saves time and helps to avoid potential fines for non-compliance.

Are There Any Disadvantages To VAT Registration?

While VAT registration for any business has its advantages, certain businesses that consider voluntary registration can experience a few disadvantages to VAT registration.

    • Increased administrative responsibility – certain companies might struggle to meet the strict deadlines and record-keeping requirements as VAT-registered businesses. The process might cost them extra fees for calculating or hiring an accountant.
    • Additional costs – the business has to now pay VAT on purchased goods and services before selling to the customer.
  • Fines for failing to stay up-to-date – there is always a risk that a company may run into financial difficulty or incur hefty fines if they fail to continually remain compliant with HMRC VAT regulations.

Best Ways For Small Businesses To Keep Track Of Their Expenses To Stay Below The Threshold old?

The fear of missing out on tax deadlines can make some businesses consider not registering for VAT if possible. The HMRC regulations can be strict, especially for businesses without measures in place to ease the taxation process.

How then does the small business keep track of their business expenses to stay below the threshold?

Here are some tips for keeping track of business expenses:

  • Set up a separate business account: having a distinct business account apart from your personal one is the first step to effectively track business spending.
  • Accurately record every expense: your finance documents must contain detailed information on vendors, amount and purpose. Consider using accounting software and linking it to your bank accounts if you have little experience. Examples are Xero, Quickbooks and Sage. Alternatively, do manual calculations on Excel sheets but know that it is time-consuming.
  • Monitor regularly: having a consistent audit schedule is the most effective way for small businesses to keep track of expenses and stay below VAT thresholds. It could be monthly or weekly. Just have time to check transaction reports and deviation from preset budget constraints designed to keep you below the VAT threshold.

Following the above steps can help small businesses stay below the VAT threshold and avoid registering for VAT until they are ready.

How Do I Register For VAT?

You can register for VAT online, via post or through a telephone call with the HMRC. registration is recommended for businesses that are close to the VAT threshold or those that will likely exceed it within the next 30 days. Any business that has also made £85,000 taxable income for the previous 12-month period is eligible to register for VAT.

The process is straightforward and your business receives a 10-digit VAT registration number. That number must be included on all invoices and receipts to customers. Detailed steps to register start from providing your business information such as business name, address, contact info, and bank account details. You should also describe the goods and services your business provides.

Other required information is the estimated turnover for the next 12 months and the VAT estimate for that period.

The VAT registration number provided by the HMRC after the process must be included when filing your tax return and payment for each tax period. A certificate of registration for VAT arrives by mail approximately a month after applying. Your business is expected to start remitting VAT with accurate records starting from the date the application is submitted.

What Are The Penalties For Not Registering For VAT?

Failure to register for VAT by eligible companies or late registration after previously exceeding the VAT thresholds can attract fines and interest charges from the HMRC. The penalty is more severe if it is proven that the business deliberately failed to register for VAT. Extreme cases involve the HMRC pursuing a criminal prosecution.

For the majority of cases, businesses that are honest about the process and register as soon as they become eligible or exceed VAT thresholds might avoid some penalties. The few penalties that are charged would then depend on how late they were, and how much is owed. We recommend contacting the HMRC immediately after you discover you might have missed registration for VAT. The HMRC would then advise you on the best legal steps to resolve the faults.

Is There A De-registration VAT Threshold?

Businesses whose taxable income falls below the VAT threshold can deregister for VAT. The current value to become eligible for deregistration is £83,000 as of the 2022/23 tax year. All requests to deregister for VAT must be made within 30 days of meeting the eligibility requirements. The HMRC would then adjust the tax returns for such deregistered companies depending on the number of days they were registered for VAT.

How Much Is VAT?

As of 2024, the standard VAT rate on the GOV.UK website is 20%. There is also a reduced rate of 5% and a zero rate of 0% for certain products and services. The government sets these rates and periodically changes them. Therefore, every business owner needs to stay up-to-date with the latest changes. Check out the general classification of goods and services for the different VAT rates.

  • Standard Rate: Most goods & services
  • Reduced Rate: Goods and services like children’s car seats and books
  • Zero Rate: Most food & drinks, children’s clothes and prescriptions
  • Exempt from VAT: Items like postage stamps, fuel for heating, finance and property transactions

Click here for the VAT rates for a comprehensive list of goods and services

Do I Need To Register My Small Business For VAT?

As a small business owner in the United Kingdom, the following conditions determine your eligibility to register your small business for VAT.

  • The annual taxable turnover of your company exceeds the current VAT threshold of £85,000 for the 2022/23 financial tax year.
  • Your business is based outside the UK but supplies goods and services within the country

You must register your company for VAT if it meets any of the above conditions. Voluntary registration is also great for businesses that believe it grants them access to input tax recoveries and other benefits.

Businesses under the VAT threshold should consult with an accountant before opting for a voluntary VAT registration process. The plan is to check for potential advantages for tax efficiency and liability compared to not registering. The cost of accounting services, compliance with HMRC regulations, expected annual turnovers and eligibility for the Flat Rate scheme are essential considerations.

Summary

The VAT threshold for small businesses in the UK is the level of annual turnover that the business must earn before reaching eligibility to register for VAT. Once registered for VAT, businesses need to charge VAT on applicable goods and services that they sell and regularly submit regular VAT returns to HMRC.

A detailed VAT tax return document must contain the breakdown of all VAT liabilities and payments due. Businesses that are eligible for VAT registration or have exceeded the threshold must register and comply with all tax regulations.

It is important to avoid missing deadlines for tax regulations as a small business. In addition, we recommend reaching out to the HMRC immediately if you think you might have breached VAT regulations on registration or if you have questions about the process.

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