What is a VAT Threshold?

The 2024 VAT threshold. We look at the registration, deregistration, and what to do if you temporarily exceed the threshold. We also look at the responsibilities involved in being VAT registered. 

Value-added tax (VAT) is a consumption tax that's added to the cost of goods and services. Businesses only have to pay VAT once their annual turnover exceeds the VAT threshold. VAT is paid to HMRC quarterly. Out of the 5.7 million businesses in the UK, only 2.768 million are registered for VAT and/or Pay As You Earn (PAYE). 

Once your business's profits exceed the set threshold, you'll have to register for VAT. This means you'll be liable for collecting VAT from customers and paying VAT on goods that they've purchased for the business. 

Your VAT obligations will depend on several factors, such as your business structure and the location of your customers. VAT is a destination-based tax, which means that the tax rate is based on the location of the customer, not the producer or seller.

In this blog, we explain what the VAT threshold is and what it means for your business.

How much is the UK VAT threshold?

According to GOV.UK, the current VAT registration threshold in the UK is £90,000. The VAT threshold is the amount of money that your business can earn before you need to register for VAT. If your business goes over this threshold:

• You'll need to charge VAT on all your sales
• You must pay VAT on the goods and services you purchase
• You must open a VAT account and maintain proper records.
• You'll need to submit VAT returns to HMRC.

This means that all businesses with annual sales above £90k must register for VAT, charge VAT on their goods and services, and pay VAT on goods and services bought for their business. The standard rate VAT in the UK is charged at 20%, and the reduced rate is 5%.

When to register for VAT

If you predict that your VAT taxable turnover will exceed the threshold within the next 30 days, you should register for VAT. The same goes if you have recently bought a business that is already VAT registered.

You must apply if your business has made more than £90,000 over the last 12 month period. It's important to note that the 12 month period doesn't have to align with the calendar year or the tax year - it can be any 12 month period.

There's no threshold if neither you nor your business is based in the UK. However, you must register for VAT as soon as you supply any goods in the UK (or if you expect to in the next 30 days). You will still need to pay tax if your store is online only and trades within the UK.

Charging VAT on services and products sold

When your business is registered for VAT, you're required to add VAT to the prices of your products or services when selling them. This means including the appropriate VAT rate in your invoices or price tags, such as the standard 20% or reduced 5%.

Paying VAT on your business expenses 

As a VAT-registered business, you also need to pay VAT on the things you buy for your business, such as materials, equipment, or services. This VAT amount is usually included in what you pay upfront, but you can reclaim some of it by deducting it from the VAT you collect from your sales.

What do to when my business turnover is over the current VAT limit

If your business exceeds the current VAT threshold, which is £90,000 in the UK, you must register for VAT. This means you'll start charging VAT on your sales, keep track of your income and expenses, and submit regular VAT returns to HMRC.

VAT deregistration threshold

Businesses can deregister for VAT if they can prove to HMRC that taxable turnover in the next 12 months will not exceed the deregistration threshold. The current deregistration threshold is less than £88,000. 

Your business might be able to deregister for VAT if you registered with the intention to make taxable supplies but no longer intend to. Or if you once made taxable supplies but have stopped and won't in the future. 

In some cases, you can deregister if the company is sold or if the business structure changes. In both instances, retailing the old VAT number and keeping it for the new business or structure is normally possible.

TIP: Explore everything you need to know about reverse charge VAT with our latest blog. Whether you're in construction, real estate, or curious about VAT regulations, this comprehensive guide tailored for UK readers will clarify the ins and outs of this crucial tax provision.

How to register for VAT after hitting the threshold? 

If you find that you exceed the VAT threshold then here's how everything you need to know about registering for VAT:

• Online registration: use the online platform on the GOV website for VAT registration, it's extremely quick and easy.
• Start VAT activities: Once your "effective date of registration," you can start charging VAT on your sales and reclaiming VAT on purchases.

When registering for VAT, the information you'll need depends on your business type. If you're registering a limited company, you'll need to provide your company registration number, bank account details, Unique Taxpayer Reference (UTR) if applicable, and details about your annual turnover. Plus, information regarding Self Assessment, Corporation Tax, and PAYE is required.

For individuals or partnerships, the needed information includes your National Insurance Number, an identity document like a passport or driving license, bank account details, UTR if available, and annual turnover details. You'll also need info related to Self Assessment return, payslips, and P60 documents.

Submitting VAT returns

When it comes to submitting your VAT Return, you've got options. You could use accounting software compatible with Making Tax Digital, ask your accountant to handle it, or log into your VAT online account (but only if you're on the VAT Annual Accounting Scheme).

Maybe computers aren't your thing due to personal reasons, or you're in a spot with internet access. Just reach out to HM Revenue and Customs (HMRC) to sort out how to send your paper return. Quick note: HMRC might slap a fine of up to £400 if you send a paper VAT Return without ticking the eligibility boxes.

Now, if your business is dealing with an insolvency procedure, paper is the way to go unless you've got your hands on a Company Voluntary Arrangement or an Individual Voluntary Arrangement. In that case, you've got the choice to go paper or digital.

Expenses that are eligible for tax reclaims 

Claiming tax relief for your job expenses can be a helpful way to offset some of the costs associated with your work. It covers a range of expenses related to your job, like working from home, work tools, travel, and more. For example, if you've had to set up a home office due to your job requirements, you might be able to get relief on additional household costs.

Here's how allowable expenses work: You can claim for things directly linked to your work, such as business phone calls and electricity for your work area. However, you can't claim expenses that you also use for personal reasons, like rent or broadband access.

The amount you can claim depends on whether you opt for a flat rate or want to claim the exact costs. With the flat rate option, you can claim £6 a week starting from 6 April 2020, and you won't need to keep evidence of your extra costs. On the other hand, if you choose to claim the exact amount of extra costs incurred, you'll need evidence like receipts or bills.

To give you an idea, if you pay the 20% basic rate of tax and claim relief on £6 a week, you'd get £1.20 per week in tax relief. This amount is adjusted based on your tax rate.

Keep VAT records and a VAT account 

Keeping track of VAT records and having a dedicated VAT account is important for business owners like yourself. It helps you stay organised and compliant with tax regulations. Your VAT records should include detailed information about all sales and purchases subject to VAT, such as invoices, receipts, credit notes, and summaries showing VAT collected and paid.

To simplify record-keeping, consider using accounting software that integrates VAT management. This can streamline the process and make it easier to track and manage your VAT-related activities. Regularly reconciling your VAT account ensures accuracy and helps identify any discrepancies that may require attention.

Prepare your accounting with schemes for the VAT threshold

Flat rate VAT scheme threshold 

The VAT Flat Rate Scheme simplifies VAT for businesses. Instead of calculating VAT owed based on purchases and sales, you pay a fixed percentage of your taxable sales back to HMRC. To join, your business must be VAT-registered, and your estimated turnover for the next year must be £150,000 or less.

VAT cash accounting scheme 

In regular VAT accounting schemes, your payments to HMRC depend on the difference between what you've invoiced your customers and what you've paid to your suppliers, regardless of whether those invoices are settled.

The Cash Accounting Scheme operates differently:

• You only pay VAT on your sales when your customers actually pay you.
• You can reclaim VAT on your purchases after you've paid your suppliers.

To join this scheme, your VAT taxable turnover must be £1.35 million or less.

Annual VAT accounting scheme 

Typically, VAT-registered businesses handle VAT Returns and payments four times annually. However, under this scheme, you can make advance VAT payments based on previous returns or estimates if you're new to VAT. This spreads out your VAT payments. Plus, you submit just one VAT Return per year instead of quarterly filings.

From 1 April 2019, digital VAT record-keeping and tax digital and software use became mandatory for most businesses. When filing your annual VAT Return, you either:

• Make a final payment, adjusting for any differences between your advance payments and the actual VAT owed.
• Apply for a refund if you've overpaid your VAT bill.

However, small businesses that regularly reclaim VAT may find this scheme less suitable due to the limit of one refund per year. Eligibility requires an estimated VAT taxable turnover of £1.35 million or less.

How Epos Now’s POS software makes your business accounting smoothly 

At Epos Now, our POS software is like having a reliable financial partner for your business. We understand the importance of smooth accounting processes, which is why our system is designed to make your life easier. Here's how we do it:

• Integration with leading accounting apps: Our cutting-edge POS software seamlessly integrates with top accounting applications like Quickbooks and Xero. This means you can effortlessly sync your sales, expenses, and other financial data, saving you time and reducing errors.
• Automated reporting: With just a few clicks, our system generates detailed reports on sales, inventory, and expenses. This gives you valuable insights into your business performance, helping you make smarter decisions.
• Real-time data: Stay up-to-date with real-time information on transactions, inventory levels, and customer details. This helps you manage your finances more effectively and respond quickly to business changes.
• Secure transactions: We prioritise security, ensuring that all transactions are safe and protecting your sensitive financial data.