What is the Threshold for VAT?: Everything You Need to Know
The UK VAT registered threshold is the amount of a business’s annual taxable turnover at which companies must register for value-added tax (VAT). This is the tax added to most products or services in the UK.
In this article, we’ll outline everything you need to know about the VAT threshold. From how to calculate it to the consequences of exceeding it, we’ll provide a comprehensive overview.
We’ll also explore the latest discussions regarding VAT thresholds, particularly the Labour government’s decision to remove the current VAT exemption for private schools, and its potential impact on these institutions.
What is the New VAT Threshold?
From 1st April 2024, the UK VAT registered threshold increased from £85,000 to £90,000.
When Was the VAT Threshold Last Increased?
Before 2024, the VAT threshold was last increased in 2019, from £83,000 to £85,000.
Previous VAT thresholds were:
- 2014-2015: £81,000
- 2015-2016: £82,000
- 2016-2018: £83,000.
Once your business’s turnover has reached the VAT threshold, you have 30 days to register for VAT with HMRC. After registration, your business will have new responsibilities, including:
- Charging VAT on your products or services.
- Submitting a VAT return to HMRC annually.
- Maintaining a VAT account and records.
- Paying VAT on goods and services supplied by your vendors.
What Happens if You Don’t Register for VAT?
Failing to register for VAT with HMRC when your business exceeds the VAT threshold can lead to significant penalties. These fines are calculated based on the amount of VAT you owe and the delay in your registration.
If you exceed the VAT registered threshold but do not register on time, HMRC will still require payment of the VAT owed from the date your business should have registered. This means the outstanding VAT will be added to your penalty, making late registration potentially very costly.
Not registering also means VAT will not have been charged on taxable goods and services. Even if it was not collected from customers, HMRC will still expect the VAT to be paid.
Alongside penalties for late registration, you may also be charged for failing to notify HMRC, which can sometimes result in a civil evasion penalty.
The penalties for late registration are as follows:
- Less Than Nine Months Late – 5% of the VAT owed in addition to the original amount.
- Nine – 18 months – 10% of the VAT owed in addition to the original amount.
- Over 18 months – 15% of the VAT owed in addition to the original amount.
How to Work Out the VAT Threshold
To determine whether your business needs to register for VAT, you must calculate your annual taxable turnover. This involves summing up your total sales over a rolling 12-month period to see whether you exceed the VAT threshold.
Most goods and services are subject to the standard VAT rate of 20%. However, certain items and services, such as books, children’s clothing and charity fundraising events, are zero-rated or exempt from VAT.
How to Register a Business for VAT
If your turnover reaches the VAT threshold, you must register with HMRC. You can do this online by logging into your Government Gateway account. If you do not already have a user ID, you can create one when you log into your account for the first time.
Registering Your Limited Company for VAT
To register once you reach the VAT registered threshold, you will need:
- Your company’s registration number
- Your business’s bank account details
- Your Unique Taxpayer Reference (UTR)
- Details of your annual turnover.
You will also need to provide information regarding:
- Your Self Assessment
- Your Corporation Tax
- Pay As You Earn (PAYE).
Registering as an Individual or Partnership
If you are registering after reaching the VAT threshold, you will need:
- Your NI number
- Proof of identity
- Your bank account information
- Your Unique Taxpayer Reference (UTR)
- Details on your annual turnover.
You will also need to provide information about:
- Your Self Assessment return
- Payslips
- P60.
Can You Register for VAT Below the Threshold?
Yes. Some businesses choose to register for VAT before their annual income reaches the compulsory threshold. But why would they do this? In most cases, the benefits outweigh the disadvantages.
VAT is collected on behalf of HMRC and does not belong to the business. Once registered, companies add VAT to their sales invoices and can reclaim VAT paid on purchases. Businesses that are not registered must still pay VAT on goods and services they buy, but cannot reclaim it.
Furthermore, if you’re just starting up and anticipate quickly reaching the £90,000 threshold, or if you will primarily be selling to VAT-registered businesses, registering allows you to claim VAT on your startup costs. This can save you money in the short term.
Despite these benefits, some businesses try to avoid exceeding the VAT threshold. One common approach is limiting annual turnover to below £90,000, for example, by restricting the customer base or closing during certain periods of the year. However, this is rarely a sustainable long-term strategy.
How Can I Reduce My VAT Bill?
While you could simply pay the standard 20% VAT on your turnover, there are several legitimate ways to reduce your VAT bill. These include:
- Flat Rate Scheme
If your annual turnover is below £150,000, you can join the Flat Rate Scheme. Under this scheme, you pay VAT to HMRC at a fixed- rate percentage based on your industry, with rates ranging from 4% to 14.5%. This is often lower than the standard rate. You must exit the scheme if your turnover exceeds £230,000. - VAT Cash Accounting Scheme
The VAT Cash Accounting Scheme allows you to pay and record VAT only when money changes hands, rather than when invoices are issued. To qualify, your VAT taxable income must be £1.3 million or less. You must leave the scheme if your taxable income exceeds £1.6 million. - Annual Accounting Scheme VAT
Under the Annual Accounting Scheme, businesses submit one VAT return annually and make advance payments towards their VAT bill throughout the year. This scheme is available to businesses with a VAT-taxable turnover of £1.35 million or less. If your turnover exceeds £1.6 million, you must leave the scheme.
Using these schemes can help improve cash flow once your business reaches the VAT registered threshold.
Do You Need Help Understanding VAT Thresholds?
At Hartley Fowler, we’re pleased to offer our clients a comprehensive range of VAT services, including:
- Registering and deregistering your business for VAT
- Preparation of your returns for approval and online submission
- Investigating contentious VAT assessments
- Planning the best VAT strategy for your business
- VAT return services
- Conducting pre-emptive VAT control visits
- Reviewing land and property transactions
- Advising on supplies of goods and services to overseas countries.
Understanding VAT thresholds can be challenging, but you don’t have to navigate it alone.
Now you know the threshold for VAT, why not enlist the help of our experts? We can assist you in creating a VAT strategy that ensures your company is both compliant and competitive, providing you with peace of mind.
If you have any further questions, please get in touch. Book a free consultation, or call us today on 020 8946 1212.