How Shelf Companies Lost Their Appeal and What to Do Now
Also known as a ready-made company or an off-the-shelf company, a shelf company is a pre-registered business you can buy and customise.
What is the VAT registration threshold?
As of 1 April 2024, the VAT registration threshold for 12-month taxable turnover in the UK, including Northern Ireland, increased from £85,000 to £90,000. This adjustment is designed to exempt most small businesses from mandatory VAT registration, helping to reduce administrative burdens and compliance costs for smaller enterprises.
See also: What is a VAT Number (Value Added Tax Identification Number)?
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Suppose your turnover exceeds the threshold due to a one-off event or anomaly. In that case, you may apply for an exemption from VAT registration, provided you can demonstrate that future turnover will remain below the threshold.
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What is taxable turnover?
According to HMRC, Taxable turnover refers to the total value of everything a business sells that is subject to VAT, excluding VAT. This includes zero-rated, reduced-rated, and standard-rated sales but excludes VAT-exempt sales.
Taxable turnover also includes:
- Goods hired or loaned to customers.
- Business goods used for personal purposes.
- Goods bartered, part-exchanged, or given as gifts.
- Services received from overseas businesses that require a ‘reverse charge.’
- Goods and services subject to the ‘domestic reverse charge.’
- Building work of over £100,000 is carried out by your business for its own use.
Find out more: HMRC Guide – When to Register for VAT
Why was the VAT threshold increased?
Increasing the VAT registration threshold was part of an economic policy aimed at creating a more supportive environment for small businesses in the UK. Raising the threshold exempts more businesses from mandatory VAT registration, helping reduce operating costs and alleviate the administrative burden associated with VAT rules compliance. This policy reflects a commitment to fostering growth and sustainability for smaller enterprises.
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Registration and deregistration thresholds are often adjusted as part of budget policy to provide businesses with greater flexibility in managing their turnover, fostering an environment that supports growth. These adjustments ensure that only genuinely small businesses remain outside the VAT bracket, reducing their administrative burden while encouraging scalability for those ready to expand.
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How soon should I register after exceeding the VAT registration threshold?
If your taxable turnover for the past 12 months exceeds the VAT threshold, you must register for VAT within 30 days of crossing the threshold. Failing to register on time can result in penalties, so it’s important to act promptly.
See also: How to check a UK VAT Number validity on GOV.UK and VIES
Are there new VAT requirements under MTD?
All VAT-registered businesses must comply with Making Tax Digital (MTD) requirements. MTD is a digital platform designed to streamline VAT return submissions and improve accuracy.
To comply, businesses are required to:
- Maintain Digital Records – Keep VAT records digital to ensure accuracy and accessibility.
- Use MTD-Compatible Software – Submit VAT returns through software that integrates with HMRC’s MTD system.
These changes aim to reduce errors, simplify the submission process, and promote more efficient business tax management.
What are the benefits of registering for VAT voluntarily?
UK VAT registration offers a range of benefits, which largely depend on the nature of your business. For B2B businesses, where clients are other VAT-registered companies that can reclaim VAT, registering can help attract more clients by making your services or products more appealing. Additionally, being VAT-registered enhances your credibility, showcasing your business as legitimate, professional, and compliant with tax regulations.
Find out more: What are the pros and cons of being VAT registered?
Is it better to stay under the VAT threshold?
Businesses must register for VAT if their taxable turnover exceeds the threshold. For B2C businesses, staying under the VAT threshold can sometimes be advantageous to avoid the challenges associated with VAT registration. These include the potential for increased costs of goods or services, which may need to be passed on to customers, or reduced profitability if the business chooses to absorb the VAT costs.
To remain under the threshold, some turn away work or reduce their operating days to keep their turnover below the limit. While this strategy can help maintain competitiveness and profitability, it may also restrict growth opportunities and long-term business potential.
Some businesses may change their structure to manage VAT obligations more effectively. For instance:
- Sole Traders: A sole trader might convert their business into a limited company. This change resets the 12 months for calculating VAT registration turnover, giving the enterprise more time before reaching the threshold.
- Limited Companies: If you already operate as a ltd, consider forming a separate limited liability partnership (LLP) to split operations and manage turnover across entities.
These approaches can provide flexibility, but they must be appropriately implemented to avoid scrutiny from HMRC. Professional advice is recommended to ensure compliance and to make the most informed decision for your business.
Warning
To stay below the VAT threshold, a business may consider splitting into two separate entities to divide its revenue. However, this strategy comes with challenges and must be executed carefully to be effective.
For the separation to work, the split businesses must operate independently and meet the following criteria:
- Each entity must have a bank account, staff, and business premises.
- Each must operate distinctly, with separate branding, websites, and operational processes.
It’s important to note that HMRC closely scrutinises such arrangements to ensure compliance. If the separation appears artificial or solely intended to avoid VAT registration, HMRC may challenge it, potentially leading to penalties. Seeking professional advice before pursuing this strategy is crucial to ensure it is implemented correctly and lawfully.
From our experience, embracing VAT registration as part of business growth can often be more beneficial than avoiding it. While increasing costs to accommodate VAT might deter some clients, particularly in B2C markets, many businesses can earn more with less effort by raising their prices and passing the VAT burden to consumers. After all, VAT is ultimately a consumer tax.
Working through the specific scenarios affecting your business with an experienced tax consultant is crucial. Limiting your growth to stay under the UK’s VAT registration threshold is unnecessary and counterproductive. While registration does come with administrative responsibilities, such as filing VAT returns, these are often manageable and should be seen as part of the growing pains of scaling a successful business.
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Another way to manage compulsory VAT registration is to choose a VAT scheme that aligns with the nature of your business. For example, the Flat Rate Scheme simplifies VAT obligations by reducing the need to track VAT on every purchase. Instead, businesses pay a fixed percentage of their gross turnover, often lower than the standard VAT rate, making compliance more straightforward and less time-consuming.
What is the UK VAT deregistration threshold?
The VAT deregistration threshold in the UK is £88,000. Businesses that fall below this threshold can apply for voluntary deregistration at any time. Deregistration allows businesses to stop charging VAT and eliminates the administrative burden associated with VAT compliance.
Other Situations for VAT Deregistration Include:
- Ceasing to Trade — You can deregister if your business ceases trading or no longer supplies taxable goods or services.
- Joining a VAT Scheme – If you opt to join a specific VAT scheme, such as the Flat Rate Scheme, you may need to deregister from the standard VAT regime to comply with the scheme’s requirements.
- Changing Business Structure — When changing the legal structure of your business (e.g., from a sole trader to a limited company), you can deregister and reregister later if the new entity meets the threshold.
Deregistration must be handled carefully to ensure compliance with HMRC regulations and avoid penalties. A tax professional can provide guidance through the process.
How can Your Company Formation help with VAT registration and deregistration?
Your Company Formations provides comprehensive support for VAT registration and deregistration.
We can guide you through the registration process, ensuring it is completed accurately and efficiently. Additionally, our experts can offer tailored advice to help determine whether you need to register for VAT based on your turnover and other business dynamics.
Whether you’re starting or reconsidering your VAT status, we’re here to support your business needs.
Also related: How to Get an EORI Number in the UK
VAT Registration Threshold
