What is the VAT threshold and when do you need to register for VAT?

Updated on May 10, 2022

A VAT handbook for small businesses, including information on registering for VAT on a voluntary or mandatory basis, the VAT threshold, and the various VAT rates to be aware of.

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In the UK, VAT is a tax levied on the majority of goods and services by VAT-registered firms. On products and services imported from outside the EU and transported into the UK from other EU nations, this tax is also applied.

In most cases, a VAT-registered firm is able to reclaim the VAT it has paid while purchasing goods or services. VAT cannot be reclaimed if the company is not VAT-registered.

Check our top accounting software picks to help you stay on top of your tax and important finance dates:

VAT-registered enterprises have been referred to as “little tax collectors” by some. A consumer is charged VAT on top of the sale price, and the cash is collected and then sent over to HM Revenue and Customs.

The subject of whether or not a firm should be registered for VAT is one that is frequently asked by entrepreneurs. There are a number of other issues to consider as well, including turnover, which we will discuss in depth below.

When do I need to register for VAT

What is the VAT threshold (compulsory VAT registration)

If a company’s taxable turnover exceeds the VAT registration threshold for any successive 12-month period, it must register for VAT. Since 1 April 2017, the VAT registration barrier has been £85,000, however this is expected to rise each year.

There was a rise in the rate from £64,000 in 2007 to £83,000 in 2016, so be sure to check for the most current rate.

Taking over a VAT-registered business is another common reason for a company to be obliged to register for VAT. If the combined taxable turnover of the buyer and the firm being purchased exceeds the VAT registration threshold in the preceding year, the business must register.

As a general rule, if you expect your company’s turnover to reach the threshold in 30 days or less, you must register for VAT. VAT registration is also required in other situations, such as when conducting business outside of the UK.

‘Failure to notify’ fines and/or late registration penalties might result from failing to register on time. For businesses that are VAT-compliant, late payment penalties and interest are likely to apply. In the event that your company’s annual revenue exceeds the VAT threshold, you may be able to request an exemption from registration from HMRC.

Voluntary VAT registration

Voluntary VAT registration is still possible for businesses that do not meet the current VAT threshold.

Registering for VAT can be done for two primary reasons:

When it comes to their clients, it doesn’t make a difference whether or not the firm is VAT-registered because they are all other VAT-registered businesses, and hence any VAT they are charged can be recouped by HMRC.

Who cannot register for VAT?

If HMRC’s VAT definition of a business does not apply to the firm, it cannot be registered for VAT.

If a business primarily sells goods or services that are exempt from VAT, it is also forbidden from registering.

Always consider the customer when registering for VAT…

Let’s use a shop as an example to elaborate on the first point:

Consumers don’t care about whether or not a store charges VAT because HMRC will refund them if they are VAT-registered enterprises.

As a result, registering for VAT is usually in the best interest of the firm, as it will be able to reclaim VAT on purchases. According to estimates, 20% of all VAT-registered enterprises are trading below the VAT registration level, therefore this strategy isn’t dangerous or dishonest.

However, a retailer cannot claim VAT back from clients who aren’t VAT-registered, such as the general public. As a result, considering whether or not to charge VAT is a wise decision because it adds an additional expense to the consumer and raises the retail price. Prices will be less competitive if the retailer’s competitors aren’t VAT-registered.

The different VAT rates

To illustrate point two, let’s look at the different categories items fall into for VAT purposes:

Name Current rate Description and examples
Standard 20% The standard rate of VAT is the default rate – this is the rate that’s charged on most goods and services in the UK unless they’re specifically identified as being reduced or zero-rated.
Reduced 5% Domestic fuel and power, installation of energy-saving materials, sanitary hygiene products, children’s car seat, etc.
Zero 0% Food (not meals in a restaurant or hot takeaways though), books/ newspapers, children’s clothes/ shoes, public transport etc.
Exempt N/a The law stipulates that VAT exempt goods or services must not have any VAT charged on them. Examples include insurance, providing credit, education, fundraising, membership, etc.
Outside the scope N/a Items that are completely outside of the UK VAT system. Examples include drawings, wages, MOT tests, rates, etc.

VAT refunds are common in the farming industry. Their purchases and transactions are largely tax-exempt. Nevertheless, they can recoup any VAT they pay for overhead or equipment, thus this is why they are entitled to a refund.

As an example of a business that could want to register for VAT, consider a children’s shoe shop or a greengrocer. Although their sales and direct purchases are normally zero-rated, they can collect VAT on any overheads, legal expenses or equipment purchases they incur.

Choosing a VAT scheme

Following your decision on whether to file for VAT, it’s time to think about which VAT plan is best for your company. The following are the three most prevalent possibilities:

VAT flat rate scheme

It’s only available to enterprises with taxable turnover of less than £150,000 (which is the sum of all your sales that aren’t VAT exempt). A fixed-rate percentage can be applied to turnover, depending on the industry, to make record keeping easier for small enterprises.

Click here for further information from HMRC.

VAT cash accounting scheme

As a small business (turnover must be less than £1.35 million), this is a popular option for those who want to avoid paying VAT until they’ve received payment from their clients. Similarly, you can only claim VAT back on purchases that have been made and paid for.

VAT payments are typically required to HMRC even if your bills have not yet been paid, which might pose liquidity problems.

The cash accounting scheme cannot be used in conjunction with the flat rate VAT system.

Annual accounting scheme

By submitting one annual return and making periodic advance payments (based on expected amounts from the previous year’s return), businesses can avoid having to file several quarterly returns.

Following the completion of your return, you have the option of making a final payment (to cover any deficit between your advance payments and the final bill) or requesting a VAT refund if you’ve paid more than you should have.

For more information on VAT registration, check out part two of this guide: How to register for VAT

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