What is the Threshold For VAT?: Everything You Need to Know
The UK VAT registration 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. Additionally, we’ll 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 registration 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 have been:
- 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. Once the process is complete, your company will acquire additional responsibilities. These include:
- 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 as a business operating within the current threshold can result in significant penalties. These fines are calculated based on the amount of VAT you owe and the delay in your registration.
The VAT owed from when you should have registered will be added to your penalty, making late registration potentially very costly.
Not registering on time means you will not have been charging VAT on any taxable goods and services, leading to missed revenue. However, HMRC will still require you to pay your VAT bill, even if you did not collect it from customers.
In addition to a penalty 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 (excluding VAT) for the past financial year, typically from April to March.
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 either fully or partially exempt from VAT.
Changes to VAT Exemptions
Recent developments may affect VAT exemptions, particularly for private institutions.
Previously, private school fees were exempt from VAT under the supply of education. However, the new Labour government, led by Sir Keir Starmer, has pledged to end this VAT exemption and business tax relief for private schools.
According to the Institute For Fiscal Studies (IFS), this policy is expected to provide a net benefit of £1.3bn to the government. The removal will be UK-wide, but, as education is devolved, each nation’s government will decide how to spend the additional money.
To determine whether you need to register for VAT, you should calculate your annual taxable turnover. This can be done by combining your total sales (excluding VAT) for the past financial year (April to March).
How to Register a Business For VAT
You can register for VAT 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.
To do so as a limited company, you’ll 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).
If you’re registering as an individual or as a partnership, you’ll 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; it never belongs to you.
VAT-registered businesses add VAT to their sales invoices and can claim any VAT included in the items they have purchased. If you are not VAT registered, you will still need to pay the VAT on your purchases but cannot reclaim it. Those who pay the tax are non-VAT registered businesses and individuals.
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 the benefits, some businesses still wish to avoid going over the VAT threshold. The most common strategies to achieve this include:
- Restricting Annual Turnover to Less Than £90,000
One straightforward approach to avoid going over the VAT threshold is to cap your annual turnover. This can be done by limiting your customer base or closing during certain periods of the year. However, this strategy is not a sustainable long-term solution for most businesses.
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.
By utilising these schemes, you can potentially improve your cash flow.
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:
Brighton: 01273 202311
Wimbledon: 020 8946 1212