Most of us have a basic understanding of VAT (Value Added Tax). VAT is a consumption tax added to the cost of most goods and services, paid by the end customer instead of the business selling the goods.
Nearly all goods and services fall under the standard rate - currently at 20%. Water, essential foods, and children's clothing is charged at 0%. In comparison, things such as gas and electricity are at the reduced VAT rate of 5%.
The VAT threshold - also known as the VAT registration threshold - is the amount a business can earn before having to register for VAT. A VAT registered business would charge the customer VAT on goods and then pay it to HM Revenue & Customs (HMRC).
However, not all businesses have to charge and pay VAT. This article will explore all things VAT threshold-related, such as the VAT threshold for 2022, how to determine if you are required to be VAT registered, and the benefits and drawbacks of being a VAT registered business.
The VAT threshold for 2022 is £85,000. It's usually set annually, typically increasing each year. However, the government has announced that the VAT threshold for UK businesses will remain at £85,000 for the next two years - until 31 March 2024.
Suppose you are currently VAT registered, but your taxable turnover does not exceed the threshold. In that case, you can apply for VAT deregistration. For 2022, the VAT deregistration threshold is £83,000, remaining the same until 31 March 2024.
When do I need to register for VAT?
Not all businesses are required to pay VAT; if your taxable turnover is below the £85,000 VAT threshold, you are not legally obligated to pay.
However, must register for VAT If any of the following conditions apply:
- Your VAT taxable turnover exceeds the £85,000 threshold for the 2021/2022 tax year
- Your VAT taxable turnover is expected to exceed £85,000 in the next 30 days
- Your VAT taxable turnover exceeded £85,000 within the last 12 months.
You must register for VAT within 30 days of satisfying any of these conditions. Failing to do so will mean you will have to pay what is owed from the date your registration should have taken effect, as well as any late-registration penalties imposed by HMRC.
Once your business has completed its VAT registration, the business will be responsible for:
- Paying VAT on goods and services bought for your business
- Charging VAT on goods and services sold to your customers
- Submitting VAT Returns to HMRC
- Keeping a VAT account and all VAT records.
However, if you want to reap the benefits of being a VAT registered business but your taxable turnover is less than £85,000, your business can choose to become VAT registered voluntarily.
Do I need to pay VAT on previous revenue?
No, you only need to start paying VAT from when you register or have reached the £85,000 threshold. Any revenue before this period does not count; therefore, you or your accountant must be tracking this accurately.
What happens if my business temporarily goes over the VAT threshold?
It could be that your business's taxable turnover has temporarily exceeded the VAT threshold but will not be sustained going forward. In this case, you may not need to register for VAT and can instead apply to be exempt from registering your business.
Your taxable turnover will be regarded as temporarily over the VAT threshold if you can prove to HMRC that your turnover over the next 12 months will stay below the VAT deregistration threshold - currently at £83,000.
For example, you have exceeded the VAT threshold if you sell £88,000 worth of goods between 1 January and 31 December 2021. However, suppose you can show HMRC that you will only sell £81,000 worth of goods between 1 January and 31 December 2022. In that case, your taxable turnover will be considered to have temporarily exceeded the current threshold. Therefore, HMRC can make a registration exception, meaning you will not have to register for VAT.
What are the advantages of VAT registration?
- Enhances the way your business is perceived: Being a VAT registered firm can give credibility to your business, making your company appear more prominent and more established. This can appeal to customers, investors, lenders, and suppliers as they will assume your turnover exceeds the VAT threshold. This is especially beneficial for smaller businesses looking to grow.
- Reclaim VAT: You can reclaim VAT back on goods and services that have been purchased from other businesses. This can also be backdated as far as four years, as long as the equipment is still being used and you have kept the VAT invoices and records.
- Your customers can reclaim VAT: If you are selling to other businesses, and they too are VAT registered, they can reclaim VAT back from HMRC. This ensures your prices are still competitive and that you can recover VAT on your costs.
- Accurate Records: Although this should be adhered to anyway, VAT registration will ensure you maintain accurate records, which will be beneficial in the long-term running of your business.
What are the disadvantages of VAT registration?
- Administrative burden: There are specific VAT record-keeping requirements that you'll need to adhere to. The extra paperwork such as keeping invoices and receipts, maintaining VAT accounting records, and filing VAT returns every quarter can be an administrative burden, particularly for slightly larger businesses. Not to mention increasing your admin and bookkeeping costs.
- Unexpected VAT bill: If you have sold more in VAT (from goods and services) than you have bought (from goods and services bought), then you would have to pay the difference to HMRC. At the standard VAT rate of 20%, this can be a hefty amount and could cause cash flow issues if you are unprepared.
- Perceived expensive goods: If your customers are not VAT registered businesses who can reclaim the VAT back, your goods and services will immediately be 20% more expensive, which can make them seem less appealing.
How do I register for VAT?
The easiest way for most businesses to register for VAT is online. Before you begin the registration process, you will need the following information:
- Your Unique Tax Reference
- Company number and registered address
- Business bank account details
- Details of associated businesses within the last two years
If applicable, you may also need details of businesses that are being bought or transferred.
You will receive a VAT registration certificate (VAT4) once you have completed the registration process, which will outline the following information:
- Your VAT registration number
- Your first VAT returns & VAT payment date
- Your effective date of registration
From this point onwards, you must quote your VAT registration number on all invoices and receipts in which VAT is applied.
Do I need to keep digital records for VAT?
In an effort to make it easier for VAT registered businesses to manage their tax affairs, the UK government released a digital records-keeping mandate.
From 1 April 2022, all VAT registered businesses - whether they exceed the VAT threshold or not - must adhere to 'Making Tax Digital for VAT' rules by keeping some of their records in digital form. The complete list can be found here, but it includes the following:
- Business name, address, and VAT registration number
- VAT accounting scheme used
- VAT on goods and services sold
- VAT on goods and services bought
- Adjustments made to a VAT return
- Rate of VAT charged on goods sold
What if I can't pay VAT?
It's common for small businesses to run into cash flow issues, especially when they are hit with a sizeable unexpected VAT bill. If you find yourself in a situation where you are unable to pay VAT, there are a few steps you can take:
- Submit your VAT return: Even if you cannot pay, submit VAT returns. It's important you don't delay this.
- Time to Pay (TTP) arrangement: Contact HMRC and try to set up a Time to Pay agreement with them. This is essentially a payment plan and will enable you to pay your tax bill in monthly installments. Typically, you will be expected to pay in full before the next quarter - in 3 months - but you may be able to arrange a 12 month period as well.
- Consult your accountant: Confer with your accountant to organise a plan on how to best meet the deadlines for your VAT payments. If you are a small business, there are finance options to consider, such as invoice factoring or arranging credit.
With each of these options, it's vital you contact HMRC's Payment Support Service immediately in order to inform them of your circumstances and avoid penalties or fines.
Are there any simplified VAT schemes that I can use?
There are several different VAT schemes businesses can utilise to make accounting for VAT easier. The VAT thresholds for accounting schemes work differently from the VAT registration threshold and will allow you to manage your VAT differently.
VAT accounting schemes are optional, and - depending on your annual sales and type of business - you will be eligible for different schemes, so it's essential to consider what's best for your circumstance. The main ones have been outlined below, but there are additional VAT schemes to choose from:
|Scheme||Eligibility||Key Points||More Info|
VAT taxable turnover for the next 12 months is £150,000 or less
|Pay VAT based on a fixed percentage of your sales|
You keep the difference between what’s charged to customers and what’s paid to HMRCCannot claim VAT back on purchases, except certain capital assets costing over £2,000
VAT taxable turnover for the next 12 months is £1.35million or less
|VAT is calculated when money changes hands rather than the invoice date|
Common among small businesses
Can’t claim VAT back on invoices that have not been paid
|Annual Accounting||VAT taxable turnover for the next 12 months is £1.35million or less||Make advance payments towards VAT bill|
Submit one VAT return annuallyNot ideal if you anticipate regular VAT repayments
The world of VAT can be a daunting subject. But there are a few key points to remember. If your business's turnover exceeds the current threshold of £85,000, you will have to VAT register your business.
This may increase your prices to customers who cannot claim the VAT back, and there will be an increased administrative burden to keep VAT records digitally. Still, there are numerous benefits to being a VAT registered business, such as the ability to reclaim VAT and an enhanced perception of your company. Therefore, even if your turnover is below the threshold, you can still register your business to reap the benefits.