The impact of the VAT threshold rise on businesses
How does the new VAT registration threshold of £90k affect your small business? Find out more about the new VAT changes in this guide from Zyla Accountants.
VAT turnover threshold determines whether a business is required to register for VAT with HMRC based on its sales.
Small and medium-sized enterprises (SMEs) should understand VAT registration rules in order to avoid incurring heavy penalties.
You will learn how the VAT registration threshold changes affect SMEs and what to do if you are affected by them.
What is VAT?
UK VAT registered businesses charge a tax on most goods and services they provide.
VAT is charged at a standard rate of 20% on most UK goods and services.
All goods and services sold by VAT-registered businesses include VAT in the price. The VAT paid on the goods and services these businesses purchase can also be reclaimed.
Unregistered businesses, however, cannot reclaim any VAT they have paid. To charge and recover VAT on business transactions, it is necessary to register for VAT.
When businesses import and export, VAT rules become more complex.
If a business purchases goods from outside the UK, they may be subject to import VAT, and if they receive services from overseas, they may be subject to 'reverse charges'.
Exporting goods overseas does not usually require businesses to charge UK VAT. In contrast, they would reverse charge the customer for services, so that they would be responsible for their own VAT.
What is the VAT registration threshold?
In April 2024, the VAT registration threshold will rise from £85,000 to £90,000.
VAT thresholds are based on turnover, which represents the total revenue generated by your business that is not exempt from VAT over the last 12 months.
Consequently, businesses with taxable turnover less than £90,000 are not required to register for VAT.
VAT registration is required for all businesses above this threshold.
Keeping under the VAT threshold requires some small businesses to sacrifice growth.
Is there a reason why the VAT threshold has been raised?
By raising the VAT threshold, more small businesses will no longer have to register for VAT.
Around 28,000 businesses will no longer handle VAT as a result of the £5,000 increase, according to Jeremy Hunt, the Chancellor.
Those businesses with annual turnover below the £85,000 threshold will also be able to increase it by £5,000.
According to some accountants, the increase of £5,000 is not significant.
If it had risen with inflation over the past seven years, it would be over £100,000 now.
Nonetheless, the UK's VAT threshold is one of the highest in Europe.
Is there a threshold for VAT deregistration?
Deregistering for VAT is the process of canceling your VAT registration.
Among the reasons why you might want to do that are:
You’ve changed your business structure, say from sole trader to limited company
Your business isn’t offering VAT-taxable goods or services anymore
Your business has stopped trading
You join a VAT group registration.
(Note: in some cases, you’ll have to deregister for VAT before you register for VAT again in your new situation.)
As of 1 April 2024, the deregistration threshold for VAT has changed.
Increasing from £83,000 to £88,000, businesses may deregister for VAT if their taxable turnover drops below that amount.
Do you need assistance with this process? Consult an accountant or tax advisor.
What does the new VAT threshold mean for businesses?
As a result of the increase in the VAT threshold, more small businesses will be excluded from registering for VAT.
You can, however, still choose to register voluntarily if this is the case for your business.
In order to register for VAT, you must earn over the new VAT threshold in any consecutive 12-month period or anticipate exceeding the VAT registration threshold within 30 days.
Your VAT registration with HMRC can be completed within 30 days after you reach the VAT threshold.
A business that is already VAT-registered and whose taxable turnover drops below £88,000 may choose to deregister.
Should your business register for VAT?
If you decide to register voluntarily, you should consider the following factors:
The goods and services you offer
The types of clients you have
Which regions you operate in.
Accountants often encourage their clients to register for VAT voluntary, so they can claim back the VAT on their expenses.
When your business is in its early stages, this can help with cash flow.
A cleaning business, for example, needs tools, cleaning products, and safety gear before it can begin offering its services. You can reclaim VAT on these purchases by registering for VAT.
The majority of businesses aspire to grow, thus registering for VAT because they believe they will reach the threshold in time. From the start, they may find it easier to register for VAT.
Some businesses opt to register for VAT despite having a lower turnover than the threshold, in an effort to look more professional.
Businesses also prefer to keep their customers, suppliers, and competitors in the dark about their size. Others will know that a business has a turnover under £90,000 if it isn't VAT registered.
VAT-registered businesses charge VAT on their goods and services, which can affect pricing competitiveness, especially if the majority of customers aren't VAT registered and can't reclaim the VAT.
There are also additional responsibilities associated with VAT registration.
Businesses must comply with Making Tax Digital rules, including keeping digital records and using MTD-compatible VAT software. VAT registration is not a good idea if you are not prepared to handle additional tax administration.
These admin tasks will include:
Adding VAT to your goods or service invoices
Claiming VAT on your supplies
Submitting your VAT return to HMRC every quarter
Maintaining a VAT account
Keeping all VAT invoices and receipts.
To determine whether voluntary VAT registration aligns with your circumstances and business objectives, you should consult an accountant.
The role of accountants in VAT registration and deregistration
The annual turnover of your business can help your accountant determine whether you need to register for VAT.
In the event that your business crosses the VAT threshold, your accountant can assist you in registering for VAT and ensure that all necessary documents are submitted to HMRC correctly.
To avoid late registration penalties, accountants should ensure clients register for VAT within the required timeframe.
A VAT scheme that suits your business size and type can be recommended by your accountant during the registration process.
Your accountant can also tell you when you are eligible to deregister from VAT if you wish to do so.
There might have been a decrease in turnover below the threshold for deregistration or the business may have ceased to operate.
Your accountant can help you prepare and submit your final business VAT return before deregistration takes effect.
Final thoughts on the VAT threshold increase
In order to comply with HMRC regulations, businesses must understand the VAT threshold.
Keep an eye on your annual turnover if you're not yet registered for VAT. This will prevent you from hitting the £90,000 threshold accidentally.
A VAT registration may be beneficial for you and your business if you discuss the pros and cons with an accountant. Your accountant will be able to assist you with the registration process if you decide to register.