What is the VAT registration threshold for small businesses in the UK?

/ Posted By - Bradleys Accountants / Categories - Taxation

VAT, or Value Added Tax, is charged when businesses purchase goods and supplies for the purpose of selling to customers, at which point they also charge the customer VAT. Based on what the difference is between VAT paid and VAT charged, the business either pays HMRC (if the latter is higher) or claims it back from HMRC (if the former is higher).

In the UK, once your small business crosses a certain turnover amount, you are required to register for VAT. But what is the current VAT registration threshold? And what are the rules around registering or not registering for VAT? In this handy guide, we tell you all you need to know about the VAT threshold for small businesses.

What is the UK VAT threshold?

The VAT registration threshold is decided every year by HMRC. The VAT threshold in 2023 was £85,000, just like it has been since the 2017-2018 financial year.

So if your business turnover crosses this threshold, or if you are aware that it will in the coming tax year, you will need to sign up for VAT. By turnover, we mean the total value of the goods and services you sell that aren’t VAT exempt (such as postage stamps or education services).

Also, it is important to remember that for certain categories of goods and services, you may need to sign up for VAT even if you have not crossed the VAT registration threshold. The same applies if you are operating in markets like the EU or Northern Ireland.

Read our blog on “MTD VAT” for more information.

What happens if you cross the threshold?

There are two ways in which VAT registration becomes mandatory:

  • You expect your sales value to cross the VAT registration threshold of £85,000 in the next 30 days
  • You crossed it over the previous 12 months

It is worth noting that the total sales is calculated on a rolling basis and doesn’t fall within the tax year.

Let us take up each of these cases in turn.

1. Exceeding the VAT registration threshold in the next 30 days

If on a certain day you realise that your business will exceed the threshold within the next 30 days (for instance, you secure an unexpectedly large new order), you will have to inform HMRC and complete the registration process.

It is important to note here that the 30-day period starts from the date of realisation (i.e. the day you get the order) and not the date that the money actually reaches you.

2. Exceeding the VAT registration threshold in the previous 12 months

You will need to sign up for VAT if your total turnover for the previous 12 months crossed £85,000. Again, the rule is that you have to sign up within 30 days of the end of the month when you have crossed the VAT threshold for small businesses. So you will need to check your accounts every month.

Also, in case you exceed the VAT registration threshold without realising it, you will need to pay HMRC the VAT amount that you owe from the date you should have registered. Plus, depending on how late you are and the circumstances of the delay, you might also be issued a fine.

What if you only temporarily cross the threshold?

It is possible to apply for an exception if you are sure that your turnover will only temporarily exceed the VAT registration threshold. In this case, you can write to HMRC and explain your circumstances and include evidence of why you are sure your turnover will not cross the deregistration threshold of £83,000 over the coming 12 months.

Note that the threshold here is the VAT deregistration amount, not the VAT registration amount.

VAT deregistration rules you should know

The threshold amount here is £83,000, as mentioned above – if you are sure your turnover will be less than this and can demonstrate it over a rolling 12 month period, you can write to HMRC and deregister. Note, however, that this is not compulsory – once you are registered for VAT, you can stay registered regardless of turnover.

On this note, we will mention that if your business has stopped trading altogether or no longer deals in VAT taxable items, you will need to cancel your VAT registration within a certain date. You can look up the rules on the UK government website or ask our expert accountants.

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    VAT threshold and accounting schemes

    Depending on your business’ circumstances, you may find one or more of these VAT turnover threshold schemes helpful. We are equipped to give you more detailed advice, but for now let us take a look at how some of these work.

    1. Flat rate VAT scheme threshold

    Under this scheme, the business pays a fixed VAT amount to HMRC rather than the difference between VAT charged and VAT paid already.

    In case the VAT charged to customers is higher, the business gets to keep the difference. However, it can no longer reclaim VAT on its purchases of supplies, except in the case of certain types of capital assets worth more than £2,000.

    To be eligible for this scheme, your VAT taxable turnover needs to be £15000 or less. You will need to apply to HMRC by filling in form VAT600FRS if you are already VAT-registered – or join at the same time as when you sign up for VAT.

    You will get confirmation of your registration on your online VAT account or by post (depending on how you signed up).

    If at any time you are no longer eligible for the scheme, you will have to leave by writing to HMRC. Afterwards, you must wait at least 12 months from the official leaving date before you can rejoin.

    2. VAT cash accounting scheme threshold

    The VAT amount that your business owes HMRC is the difference between your sales and purchase invoices. You are required to pay this amount even if your customers have not paid you yet.

    Under the cash accounting scheme, however, you can pay sales VAT when your customers pay you and reclaim purchase VAT after you have paid your supplier. In other words, you will operate according to the cash basis of accounting.

    You can join at the start of a VAT accounting period and leave at the end of one. In case you decide to leave, you do not have to tell HMRC, but you must report and pay any outstanding VAT within six months (or right away if your turnover exceeded £1.35 million in the last three months).

    You are eligible for this scheme if you are registered for VAT and if your estimated VAT turnover is £1.35 million or less in the next 12 months.

    Note that you cannot use cash accounting if you are registered under the Flat Rate Scheme, if you are guilty of a VAT offence in the last 12 months, or if you are not up-to-date with your VAT returns or payments. In addition, cash accounting isn’t allowed if:

    • A VAT invoice is raised in advance
    • You are moving goods into a custom warehouse
    • The VAT invoice payment terms are 6 months or more
    • You are importing goods from the EU into Northern Ireland
    • Lease purchase, hire purchase, or conditional sale is involved

    3. Annual accounting scheme VAT threshold

    Normally, businesses registered with VAT need to submit VAT returns and payments to HMRC four times a year. But under this scheme, you can make advance payments towards your next VAT bill and also submit returns only once a year.

    At the time of the returns submission, you will need to pay the difference between your advance VAT payments and your actual VAT bill, or claim a refund if you have paid more than the bill amount.

    To be eligible for this scheme, your VAT taxable turnover needs to be £1.35 million or less. You can sign up at the same time as your VAT registration, or fill in form VAT600 AA later.

    In case you are signing up for the ‘flat rate scheme’ too, you can use the combined VAT600AA/FRS form. As with the other two schemes, you will have to leave as soon as you are no longer eligible for the scheme.

    Receiving both VATable and non-VATable income? Check out out blog on “business vs. non-business VAT” if you are unsure about whether you can recover any VAT.

    In conclusion

    Now that you understand the implications of meeting the VAT registration threshold and what schemes you are eligible for, it is time to set your business processes up to be VAT-ready.

    At the heart of seamless VAT reporting and payment is your invoicing, which is where Bradleys Accountants comes in.

    Let our proficient practice staff create and share detailed invoices with all your customers and offer them easy payment methods.

    Whether you follow cash accounting or accrual accounting, we make getting paid much easier, which means you pay your VAT dues on time, every time.

    We will also check for errors in your books of accounts and make sure your VAT returns are taken care of promptly.

    Do not make VAT a complicated function in your mind. Avoid making mistakes or being selected by the taxman for a tax investigation with appropriate and timely help. Contact Bradleys Accountants today.

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