What is the VAT threshold?

By Tim Adler on Small Business UK - Advice and Ideas for UK Small Businesses and SMEs

The VAT threshold is the volume of annual turnover at which businesses are required to register for value-added tax (VAT).

The current UK VAT registration threshold stands at £85,000. From April 1 2024, it will increase to £90,000, as announced by Chancellor, Jeremy Hunt.

VAT thresholds for previous years are as follows:

• 2014–2015 – £81,000
• 2015–2016 – £82,000
• 2016–2018 – £83,000
• 2019-2024 – £85,000

Once your business’s turnover reaches the VAT threshold, you have 30 days to register for VAT with HMRC. When this process is complete, your business has a extra responsibilities including:

• Charging VAT on your products or services
• Paying VAT on the goods or services supplied by your vendors
• Submitting your VAT return to HMRC every year
• Maintaining a VAT account and records

VAT registration

Registering for VAT is a legal requirement for businesses that exceed this threshold, and the threshold is reviewed regularly by HMRC.

You need to register for VAT if your small business has earned more than the VAT threshold within any 12-month period or if you expect your VAT taxable turnover to cross the VAT registration threshold within the next 30 days.

The 12-month period in question does not necessarily need to coincide with the tax year. You should regularly check whether your VAT taxable turnover for any given 12-month period has crossed the current VAT registration threshold.

Pro tip: Even if you have just crossed the £85,000 (£90,000 after April 1, 2024) VAT registration threshold, you must register within 30 days of the end of the month in which you crossed the line. It is important to keep a close eye on your turnover on at least a monthly basis, particularly as you approach the threshold.

Is VAT threshold on turnover or profit?

The VAT threshold is measured on turnover. Your turnover is the total value of everything you sell that is not exempt from VAT.

VAT exempt goods and services include:

• Education and training
• Healthcare and medical treatment
• Funeral plans, burial or cremation services
• Antiques

Zero-rated goods and services include:

• Incontinence products, maternity pads, sanitary protection
• Books, magazines and newspapers
• Babywear
• Children’s clothes and footwear
• Cycle helmets

Different VAT rates

How VAT threshold is calculated

You can calculate your annual taxable turnover by adding together your total sales (excluding any VAT) across your products and services the last financial year (April to March).

For example, if you sold £60,000 worth of goods over 12 months and £30,000 worth of services, then your total VAT taxable turnover would be £90,000.

Because you have crossed the £85,000 VAT threshold, you must register for VAT and start charging it on applicable goods and services sold from that point onward. From April 1, 2024, you’ll also have crossed the threshold and you must register for VAT.

Sole traders and VAT – Whether you pass the VAT threshold or register for VAT voluntarily, we explain everything you need to know about Value Added Tax

What if it’s just a blip?

It’s possible that your business will cross the VAT threshold but only on a temporary basis. Therefore, it’s possible to request your small business has a registration “exception”, which means you don’t need to register for VAT.

This VAT registration exception is something you must apply for – it’s not enough to say nothing and argue the case later.

Write to HMRC and explain the circumstances as to why your are applying for permission not to register. Reasons for not registering for VAT, even if you have crossed the VAT threshold, include:

• Crossing the VAT threshold was a one-off event
• That there’s no likelihood of your crossing the VAT threshold again in the near future

You will also need to supply supporting documents to support your case.

Pro tip: Even if HMRC accepts your application for a VAT exception, remember that it is a one-off and not an ongoing exclusion. You’ll still need to register for VAT if your turnover again exceeds the VAT threshold.

Registering for VAT voluntarily

You can still register for VAT voluntarily, even if your taxable turnover does not exceed the VAT registration threshold of £85,000 (£90,000 from April 2024).

The advantage of this is that you become cheaper if you’re customers are also registered for VAT. They can claim VAT back on whatever they buy from you, saving them 20 per cent compared to if you weren’t registered for VAT.

It is estimated that around 20 per cent of all VAT-registered businesses trade below the VAT registration threshold.

Also, if you’re just starting up and you know that you’re quickly going to hit the £85,000/£90,000 VAT threshold, or that you will be mostly selling to VAT-registered businesses, you can claim your VAT on the costs of setting up – saving you money in the short term.

Do grants count towards VAT threshold?

Grant funding is typically outside the scope of VAT.

How do I pay VAT to HMRC?

Of course, you could just hold your nose and hand 20 per cent of your turnover over to the taxman but there are legitimate and official ways to reduce you VAT bill and smooth out payments to help cashflow:

• Flat Rate Scheme – If your annual turnover is less than £150,000, you may join this scheme to pay VAT to HMRC at a fixed-rate percentage of turnover, depending on industry. VAT rates under the Flat Rate Scheme range from 4 per cent to 14.5 per cent compared with 20 per cent standard rate. If you’re part of the Flat Rate Scheme, you must leave once your turnover goes above the compulsory deregistration threshold of £230,000.
• VAT Cash Accounting Scheme – This works similarly to regular cash accounting, where VAT is paid and recorded when money changes hands, rather than when an invoice is received. To join the VAT Cash Accounting Scheme, you must have a VAT taxable turnover of £1.35 million or less. There’s a compulsory deregistration threshold, and you must leave the scheme if your taxable turnover is more than £1.6 million.
• Annual Accounting Scheme VAT – Under the Annual Accounting VAT Scheme, businesses submit one VAT Return per year and make advance payments towards their VAT bill. You can join the scheme if your VAT taxable turnover is £1.35 million or less. Companies participating in the Annual Accounting VAT Scheme must leave when their turnover crosses the £1.6 million deregistration threshold.

How to stay under the VAT threshold

If you’re a tradesman especially, having to charge your customers an additional 20 per cent is not very palatable – it puts you at a disadvantage compared with rivals.

One way to stay under the threshold is to split your business into two or more separate businesses, according to Checkatrade, but each part of your company needs to offer different services to make the distinction clear. Having separate bank accounts for each business is also helpful.

Sole traders increasingly avoid charging VAT – Tens of thousands of small businesses deliberately stay small to avoid charging VAT, which means you have to hike prices if you wander over the £85,000 threshold

More on VAT

Import duty and zero VAT rated goods – If I want to import zero VAT-rated goods, will I still have to pay import taxes on them? Where can I find more information about this?

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