What the VAT registration threshold rise means for businesses

The VAT turnover threshold is the sales limit that determines whether a business is required to register for VAT with HMRC.

It’s vital for accountants and small businesses alike to understand the VAT registration rules, so small an medium-sized enterprises (SMEs) can avoid incurring hefty penalties for late VAT registration.

In this article, we dive into the VAT registration threshold changes, so you understand how they affect SMEs, and what to do if these changes affect you.

Here’s what we cover:

What is VAT?

Value Added Tax (VAT) is a tax charged on most goods and services provided by VAT registered businesses in the UK.

The standard VAT rate charged on most UK goods and services is 20%.

VAT registered businesses include VAT in the prices of goods and services they sell to both business and non-business customers. These businesses are typically eligible to reclaim VAT paid on the goods and services they purchase too.

However, businesses that haven’t registered for VAT are unable to reclaim any VAT they’ve paid. VAT registration is necessary to both charge and recover this tax on business transactions.

The VAT rules become more complex when businesses are importing and exporting.

When a business buys goods from outside the UK, they may need to pay import VAT on these goods, and for services received from overseas, the ‘reverse charge’ applies.

Businesses do not normally need to charge UK VAT on goods exported overseas. But for services, they would apply the reverse charge so the customer would account for VAT in their own country.

What is the VAT registration threshold?

On 1 April 2024, the VAT registration threshold rose from £85,000 to £90,000.

The VAT threshold is measured on the turnover of the previous 12 months, which is the total amount of revenue generated by your business that is not exempt from VAT.

This means that businesses with taxable turnover less than £90,000 are not required to register for VAT.

All businesses above this threshold are legally required to become VAT registered.

It’s worth noting that some small businesses sacrifice growth in order to stay under the VAT threshold.

Why has the VAT threshold been increased?

The intent of the VAT threshold increase is to remove the burden of VAT registration from more small businesses.

According to the Chancellor, Jeremy Hunt, the £5,000 increase will take around 28,000 businesses out of handling VAT.

It will also allow those businesses who maintained turnover below the £85,000 threshold to increase their annual turnover by £5,000.

£5,000 is not a significant increase and, according to some accountants, HMRC has not gone far enough.

The threshold has been frozen for the past seven years and had it risen with inflation, it would now be above £100,000.

Having said that, the UK has one of the highest VAT thresholds in Europe.

What is the VAT deregistration threshold?

If you want (or need) to cancel your VAT registration, the process is known as ‘deregistering for VAT’.

There are a number of reasons why you may want to do that, including:

• 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.)

The VAT deregistration threshold changed on 1 April 2024.

Businesses may deregister for VAT if their taxable turnover drops below £88,000, an increase from £83,000.

Need help with this process? Speak to an accountant or tax adviser.

What the new VAT threshold means for businesses

The increase in VAT threshold will mean more small businesses will be excluded from registering for VAT.

However, if this is the case for your business, you’ll still be able to register voluntarily if you choose to.

If your business earns over the new VAT threshold in any consecutive 12-month period, or if you anticipate that your VAT taxable turnover will exceed the VAT registration threshold within the next 30 days, you must register for VAT.

Once you reach the VAT threshold, you have a 30-day window to complete your VAT registration with HMRC.

If your business is already VAT registered and your taxable turnover drops below £88,000, you may choose to deregister.

Should your business register for VAT?

There are pros and cons for registering voluntarily, and your decision should take into account:

• The goods and services you offer
• The types of clients you have
• Which regions you operate in.

Many accountants encourage their clients to register for VAT voluntary, so they can claim back VAT on costs.

This can help your business with cash flow, particularly during the early stages of the business.

For example, if you’ve just opened a cleaning business, you’ll need to buy tools, cleaning products and safety gear before you can begin offering your services. By registering for VAT you can reclaim VAT paid on these purchases.

A significant number of businesses aspire to grow, therefore decide to register for VAT because they believe they will hit the threshold in time anyway. They may find it easier to set up the business for VAT from the start.

Also, some businesses opt to be VAT registered due to the status element of looking more professional, despite their turnover being lower than the threshold.

Many businesses also prefer their suppliers, clients and competitors not to know how big they are. If a business isn’t VAT registered, others will know their turnover is less than £90,000.

On the other hand, VAT-registered businesses must charge VAT on their goods and services, which could affect pricing competitiveness, especially if the majority of customers are non-VAT registered individuals or businesses and therefore can’t reclaim the VAT they’ve paid.

VAT registration comes with additional responsibilities too.

Businesses will need to follow the Making Tax Digital rules including keeping digital records and using MTD-compatible VAT software to submit returns to HMRC. You shouldn’t voluntarily register your business for VAT if you can’t commit to additional tax admin.

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.

Ultimately, you should consider seeking advice from an accountant to determine whether voluntary VAT registration aligns with your circumstances and business objectives.

How accountants can help with VAT registration and deregistration

Your accountant will be able to help you assess whether your business needs to register for VAT based on your annual turnover.

Once your business crosses the VAT threshold, your accountant can guide you through the VAT registration process in a timely manner and ensure all necessary documentation is submitted correctly to HMRC.

Accountants should ensure all clients register for VAT within the required timeframe to avoid any penalties for late registration.

During the registration process, your accountant can advise on the most suitable VAT scheme based on the size and type of business.

If your wish to deregister from VAT, your accountant will also be able to advise when your business is eligible.

This could be due to decrease in turnover below the deregistration threshold or the business ceasing to trade.

HMRC requires a final VAT return before deregistration takes effect, so your accountant can help you prepare and submit your final business VAT return.

Final thoughts on the VAT threshold rise

Understanding the VAT threshold is vital for businesses to stay compliant with HMRC regulations.

If your business is not currently registered for VAT, you need to keep a close eye on your annual turnover, so you don’t unknowingly hit the £90,000 threshold.

If you believe registering for VAT may be beneficial for you and your business, you can discuss the pros and cons with your accountant. If you decide to register, your accountant will be able to help you with the registration process.