What Is The VAT Threshold For Small Businesses?

The VAT threshold for small businesses is set at £85,000 for the tax year 2022/23. This means that any business with an annual taxable turnover of £85,000 or more must be VAT registered, add VAT at the current applicable rate to the price of applicable goods and services sold, and submit VAT returns with payment due to HMRC every three months. Businesses earning under this threshold can decide to voluntarily register for VAT if they want to.

Read on for more information on the VAT threshold, what it means for small businesses, and how to register.

What Is VAT?

Value added tax (VAT) is a type of consumption tax that is applied to all goods and services with a few exceptions. In simple terms, this type of taxation means that consumers are required to pay an additional fee when purchasing certain items and businesses are required to pass on VAT charged to HMRC.

What Is The Purpose Of The VAT Threshold?

The purpose of the VAT threshold is to make sure that only businesses with a certain level of turnover are required to pay Value Added Tax (VAT). This helps reduce the administrative burden for smaller businesses and protects them from having to pay tax on income they’ve not yet received.

This in turn means they are not at a disadvantage against larger companies that can absorb higher costs associated with taxation and also means that they don’t have to pass on any additional costs associated with taxation to their customers, which in turn can help them remain competitive and keep prices stable.

How To Calculate Total Annual VAT Taxable Turnover

Annual taxable turnover is the total value of all taxable goods and services sold by a business in one financial year. In the UK, this is usually from April to March of each year. The total VAT taxable turnover is calculated by adding together the total sales (excluding any VAT) across all of your products and services over 12 months.

For example, if you sold £80,000 worth of products over 12 months and another £5,000 in services (excluding any VAT) then your total VAT taxable turnover would be £85,000.

This number should then be compared to the current VAT threshold. If it is above the threshold, you are required to register for VAT and start charging it on applicable goods and services sold from that point onward.

VAT-registered businesses must keep accurate records of their taxable sales, including any that fall below the threshold. This information is then used to calculate their VAT liability when they submit their returns to HMRC.

Who Needs To Register For VAT?

You need to register for VAT if any of the following are true:

Your total VAT taxable turnover was over £85,000 in the last 12 months.
You think your turnover will exceed £85,000 within the next 30 days.

In addition, if you provide goods or services to customers in the UK (or will within the next 30 days), and you’re located outside of the UK, or your company is based overseas, then you must still register for VAT, regardless of your turnover.

Finally, there are some specific sectors such as motor traders and insurance companies that must always register for VAT irrespective of their turnover.

VAT Threshold: Taxable turnover over £85,000
Deregistration Threshold: Taxable turnover under £83,000
Registration for bringing goods into the UK from the EU: Taxable turnover of more than £85,000

Who Doesn’t Need To Register For VAT?

Businesses with a turnover below the VAT threshold don’t need to register for VAT and can continue trading without it. There may be advantages to registering voluntarily though, such as being able to offset any input tax on purchases against their output tax payable, but this must be weighed up against the extra cost and administrative burden of having to submit returns and pay taxes to HMRC.

If all the items you sell are exempt from VAT, then you don’t have to register for it.

The following goods and services are exempt from VAT and you can see a full list on HMRC’s website here:

financial services, investments and insurance
garages, parking spaces and houseboat moorings
property, land and buildings
education and training
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?

Being VAT registered can bring several benefits for limited companies in the UK, including:

Access to the Flat Rate Scheme – This scheme allows businesses to pay a flat rate of VAT rather than the standard rate. This could save businesses money and make accounting and tax returns easier.
Increased credibility – Being VAT registered can give customers more confidence in your business and attract larger clients.
The possibility to reclaim VAT on purchases you’ve made for your business – Being VAT registered allows businesses to reclaim any VAT paid on goods and services purchased for their business.
Having access to HMRC records also facilitates tax booking and periodic compliance checks, saving time and avoiding potential fines down the road.

Are There Any Disadvantages To VAT Registration?

Whilst there are some advantages to being registered for VAT, there are also some disadvantages to consider when deciding if voluntarily registering is right for your business, including:

Increased administrative burden – Some companies may find it difficult to meet the more stringent record-keeping requirements of a VAT registered business. It can also be time-consuming and costly
Additional costs – You will need to pay VAT on goods and services purchased for your business, meaning that it will cost more to run.
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?

Despite having its benefits, some business owners will want to put off registering for VAT if possible. To do this, they will need to keep a close eye on their finances to ensure that they stay below the VAT threshold.

Here are some tips for keeping track of business expenses:

Set up a separate account: It’s best practice to set up a separate bank account so that you can easily keep track of business spending. Keep accurate records
Make sure all expenses are recorded accurately, with full details of the vendor, amount and purpose. This can easily be done using accounting software that links to your bank accounts such as Xero, Quickbooks, Sage, and many more. It can also be done manually using excel spreadsheets but this is far more time-consuming.
Monitor regularly: Set aside time each month to audit existing transactions and expense reports to monitor any deviations from budget constraints and mitigate overspending. This review time will also help you to keep an eye on your spending to ensure that you remain below the VAT threshold.
Review your outgoings – Look for areas where you can cut down on costs and ensure that you are not overspending.

By following these simple steps, small businesses can ensure that they stay below the VAT threshold and avoid registering for VAT until they need to.

How Do I Register For VAT?

If you are close to the VAT threshold and will exceed it in the next 30 days, or made £85,000 in taxable income last year, you will need to register for VAT, and thankfully it’s a simple process to get up and running.

You can register for VAT online, via post or by telephone call with HMRC. Once you’re registered, you will receive a 10-digit VAT registration number that must be included on all invoices and receipts to customers.

To register for VAT, you’ll need to provide details such as your business name and address, contact information, bank account details and a description of the goods or services you supply. You’ll also need to include your estimated turnover in the next 12 months and how much VAT you expect to pay.

Once the registration is complete, you’ll receive a VAT registration number which must be given to HMRC at the end of each tax period for filing your return and payment. Your certificate will arrive in the mail around one month after you submit your application, and you must start accounting for VAT with accurate records from the date of submission.

What Are The Penalties For Not Registering For VAT?

If you do not register for VAT when required, you may be subject to fines and interest charges from HMRC. If you are found to have deliberately failed to register for VAT, the penalties can be severe. In certain cases, HMRC may pursue criminal prosecution.

In the majority of cases though, as long as you are honest and register for VAT as soon as possible, most penalties can be avoided. Any that are due will depend on how late you are, and how much you owe. You should always contact HMRC at the earliest opportunity if you think you’ve missed your obligation to register for VAT so that they can advise on any next steps.

Is There A De-registration VAT Threshold?

Businesses can deregister for VAT if their taxable income falls below the threshold. The amount at which you can deregister is currently £83,000 for the 2022/23 tax year, and it must be requested within 30 days of surpassing this threshold.

Once you have deregistered, HMRC will adjust your return based on the number of days you were registered for VAT.

How Much Is VAT?

The standard rate of VAT in the UK is 20% as of 2022 and there is also a reduced rate and zero rate band for certain products and services. The rate of VAT is set by the Government and changes are made periodically so it’s important to keep up-to-date with the latest changes to manage your business finances effectively.

Standard Rate: Most goods & services
Reduced Rate: Children’s car seats, books & some other goods & services
Zero Rate: Most food & drink, children’s clothes, prescriptions
Exempt from VAT: postage stamps, fuel for heating, finance & property transactions

Click here to read the full list of goods, services, and the rate of VAT that is applicable.

Do I Need To Register My Small Business For VAT?

If you are a small business owner in the United Kingdom, you must ask yourself if you need to register your small business for VAT.

If your company’s annual taxable turnover is more than the current VAT threshold of £85,000 for the 2022/23 tax year in the United Kingdom, then VAT registration is mandatory.
If your business is based overseas but supplies goods or services within the UK then also the registration is necessary.
Voluntary registration may be beneficial in certain cases regardless of turnover or size of business as it can give access to input tax recoveries and other potential benefits.

If you are under the VAT tax threshold, you should work with your accountant to evaluate whether registering your small business for VAT could give you an advantage in terms of tax efficiency and liability compared to not registering for VAT.

It’s important to weigh up all variables before making this decision, such as costs of accounting services, compliance with HMRC regulations, expected turnover for the year and eligibility for Flat Rate schemes or any tax reduction incentives available nationally or regionally.

Summary

The VAT threshold is the level of annual turnover a business in the UK can earn before it must be registered for VAT. Registering for VAT means that you will need to charge VAT on the price of applicable goods and services that you sell and you will need to submit a VAT return every three months to HMRC with a breakdown of your VAT liabilities and payments due.

If your business does exceed the threshold and is required to register, it’s important to understand all of the associated rules and regulations so that you can ensure compliance. As a small business owner, staying on top of your tax obligations is critical and HMRC offers a wide range of advice and resources to help keep you informed.

If you have any questions or need further advice, a professional tax accountant will be able to provide the right advice for your particular circumstances, and there is plenty of information available directly from HMRC too which can both ensure that you remain compliant and don’t face any penalties or fines in the future

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