The VAT threshold is the turnover limit that determines whether a business must register with HMRC for VAT.
It is important for both accountants and small businesses to understand VAT registration rules so that small and medium-sized enterprises (SMEs) can avoid hefty penalties for late VAT registration.
In this article we take a closer look at the changes to VAT registration thresholds so you can understand how they impact SMEs and what to do if these changes affect you.
Here’s what we cover:
What is VAT?
Value Added Tax (VAT) is a tax levied on most goods and services provided by VAT registered businesses in the UK.
The standard VAT rate for most goods and services in the UK is 20%.
Businesses subject to VAT include VAT in the prices of the goods and services they sell to both business and private customers. These companies are also usually entitled to reclaim the VAT paid on the goods and services they purchase.
However, companies that have not registered for VAT cannot reclaim the VAT paid. In order to collect and refund this tax on business transactions, VAT registration is required.
VAT regulations become more complex as companies import and export.
If a business buys goods from outside the UK, it may have to pay import VAT on those goods, and services sourced from abroad are subject to the reverse charge.
Businesses do not normally have to charge UK VAT on goods exported abroad. However, for services they would apply reverse chargeability, meaning the customer would have to pay VAT in their own country.
What is the threshold for VAT registration?
On April 1, 2024, the VAT registration threshold increased from £85,000 to £90,000.
The VAT threshold is measured based on the last 12 months’ turnover, which is your company’s total turnover that is not exempt from VAT.
This means that businesses with a taxable turnover of less than £90,000 are not required to register for VAT.
All companies above this threshold are legally required to register for VAT.
It is worth noting that some small businesses sacrifice growth to stay below the VAT threshold.
Why was the VAT threshold increased?
The aim of increasing the VAT threshold is to free more small businesses from the burden of VAT registration.
According to Chancellor Jeremy Hunt, the £5,000 increase will exempt around 28,000 businesses from VAT.
Additionally, businesses whose turnover is below the £85,000 threshold can increase their annual turnover by £5,000.
£5,000 is not a significant increase and, according to some accountants, HMRC has not gone far enough.
The threshold has been frozen for seven years and, had it risen with inflation, would now be above £100,000.
However, the UK has one of the highest VAT thresholds in Europe.
How high is the sales tax deregistration threshold?
If you want (or need) to cancel your VAT registration, the process is called “deregistering for VAT”.
There are a number of reasons why you might want to do this, including:
- You have changed your business structure, for example from a sole trader to a limited company
- Your company no longer offers goods or services subject to VAT
- Your company has stopped trading
- You join a VAT group registration.
(Note: In some cases, you may need to deregister for sales tax before you can reregister for sales tax in your new situation.)
The threshold for VAT deregistration was changed on April 1, 2024.
Businesses can opt out of VAT if their taxable turnover falls below £88,000, an increase from £83,000.
Do you need help with this process? Speak to an accountant or tax advisor.
What the new VAT threshold means for companies
Increasing the VAT threshold will result in more small businesses being excluded from VAT registration.
However, if this is the case for your company, you can still register voluntarily if you wish.
If your business generates more than the new VAT threshold in a consecutive 12-month period or you expect your VATable turnover to exceed the VAT threshold within the next 30 days, you must register for VAT.
Once you have reached the VAT threshold, you have 30 days to complete your VAT registration with HMRC.
If your business is already VAT registered and your taxable turnover falls below £88,000, you may choose to de-register.
Should your company register for VAT?
There are pros and cons to voluntary registration, and you should consider the following when making your decision:
- The goods and services you offer
- The types of customers you have
- In which regions you operate.
Many accountants encourage their clients to voluntarily register for VAT so that they can reclaim VAT on costs.
This can help your business with cash flow, especially in the early stages of the business.
For example, if you have just opened a cleaning business, you will need to purchase tools, cleaning products, and safety equipment before you can offer your services. If you register for VAT, you can reclaim the VAT paid on these purchases.
Many companies are looking for growth and therefore choose to register for VAT, assuming that they will reach the threshold in time anyway. You may find it easier to set up the company for VAT right from the start.
Additionally, some companies choose to register for VAT because their status appears more professional, even though their turnover is below the threshold.
Many companies also want their suppliers, customers and competitors not to know how big they are. If a business is not VAT registered, others will know that its turnover is less than £90,000.
On the other hand, VAT registered companies will have to collect VAT on their goods and services, which could affect price competitiveness, especially if the majority of customers are not VAT registered individuals or companies and therefore cannot reclaim the VAT they have paid.
VAT registration also entails additional obligations.
Businesses must follow the Making Tax Digital rules, including keeping digital records and using MTD-compatible VAT software to submit tax returns to HMRC. You should not voluntarily register your business for VAT if you cannot commit to additional tax administration.
These administrative tasks include:
- Adding VAT to your goods or services invoices
- Claiming VAT on your deliveries
- Submit your VAT return to HMRC quarterly
- Maintaining a sales tax account
- Retention of all invoices and receipts with VAT shown.
Ultimately, you should consider seeking advice from an accountant to determine whether voluntary VAT registration is consistent with your circumstances and business objectives.
How accountants can help with VAT registration and de-registration
Your accountant can help you assess whether your business needs to be registered for VAT based on your annual turnover.
Once your business exceeds the VAT threshold, your accountant can guide you through the VAT registration process in a timely manner and ensure all required documentation is correctly submitted to HMRC.
Accountants should ensure that all clients register for VAT within the required deadline to avoid penalties for late registration.
During the registration process, your accountant can advise you on the most appropriate VAT regime based on the size and type of business.
If you want to deregister from VAT, your accountant can also tell you when your business is eligible.
This could be due to sales falling below the opt-out threshold or the company going out of business.
HMRC will require a final VAT return before deregistration takes effect so that your accountant can assist you in preparing and filing your final business VAT return.
Final thoughts on raising the VAT threshold
Understanding the VAT threshold is crucial for businesses to comply with HMRC regulations.
If your business is not currently registered for VAT, you will need to keep a close eye on your annual turnover to ensure you don’t unknowingly hit the £90,000 threshold.
If you think registering for VAT could be beneficial for you and your business, you can discuss the pros and cons with your accountant. If you decide to register, your accountant can assist you with registration.