Small Business VAT Registration Threshold Explained
Everything you need to know about the VAT registration threshold after April 2024.
Key Highlights
- Businesses are legally required to register for VAT if their taxable turnover exceeds £90,000 in the previous 12 months or if they expect it to exceed this threshold within 30 days.
- VAT registration is not mandatory for businesses with a taxable turnover below the £85,000 threshold.
- However, some small companies may voluntarily register to take advantage of benefits, such as reclaiming VAT on business expenses or enhancing their credibility.
What Is VAT and How Does It Work?
VAT, or value-added tax, is a consumption tax applied to products or services whenever value is added at each stage of the supply chain, including production, distribution, and final sale.
In the UK, VAT-registered businesses must charge VAT on most products and services. Additionally, VAT is applied to certain imported goods and services from EU and non-EU countries.
VAT is added to the sale price when VAT-registered companies sell these goods or services to commercial or non-commercial entities.
On the other hand, VAT-registered businesses can usually reclaim the VAT they pay when purchasing products or services for their business.
Find out more: What is a VAT Number?
What are the pros of being VAT registered?
VAT registration is a legal requirement for businesses whose annual turnover exceeds the £90,000 threshold within a 12-month period. However, many companies choose to register voluntarily, even below the threshold, because of its numerous advantages. These benefits include –
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Charge VAT on sales – VAT-registered businesses can charge VAT on the sale of most products and services, ensuring compliance with tax regulations and creating opportunities to manage cash flow effectively.
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Reclaim VAT on purchases – One key benefit is reclaiming VAT. If the VAT you pay on business expenses (input VAT) exceeds the VAT you charge on sales (output VAT), you can claim a refund for the difference. This capability allows businesses to recover VAT on eligible purchases from other VAT-registered companies, significantly reducing operating costs.
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Enhanced business credibility – VAT registration can elevate a small business’s image, making it appear more established and credible. This perception can appeal to customers, clients, investors, and suppliers, who may assume the company has surpassed the £85,000 threshold due to its VAT registration status.
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Attract better business opportunities – Many businesses prefer to work with VAT-registered companies, perceiving non-registered firms as “too small” or less established. A VAT number displayed on letterheads, invoices, and other official documents adds legitimacy and professionalism.
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Backdate VAT claims – Companies registering for VAT voluntarily can backdate their registration by up to four years. This allows them to reclaim VAT paid on equipment or goods still in use, provided they supply sufficient evidence to HMRC.
These advantages can make VAT registration appealing for businesses, even when not legally required, by enhancing financial opportunities and improving business reputation.
What are the cons of being VAT registered?
VAT registration is not mandatory if your business does not exceed the £90,000 turnover threshold. In such cases, it’s essential to carefully consider the disadvantages before opting for voluntary VAT registration. If the cons outweigh the benefits for your business, it may be best to avoid registering voluntarily.
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Higher costs for non-VAT registered customers – If some of your clients or customers are not VAT registered, they cannot reclaim the VAT on their purchases. This means they bear the full VAT charge, which can make your products or services significantly more expensive and less competitive, negatively impacting your sales and customer retention.
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Risk of owing VAT to HMRC – Output VAT (the VAT you charge on sales) exceeds your input VAT (the VAT you reclaim on purchases), you may owe a significant amount to HMRC. This can impact your cash flow, especially for businesses with low margins or those not accustomed to managing VAT payments.
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Increased administrative burden – VAT-registered businesses must maintain detailed records, including VAT invoices and receipts, and file VAT returns every three months. The administrative workload can be time-consuming and requires strict accuracy, which may lead to additional costs if you need professional help to manage VAT compliance.
By carefully weighing these potential downsides against the benefits of VAT registration, businesses can make an informed decision that aligns with their financial and operational needs.
Warning
While VAT registration may be an attractive and logical choice for B2B companies, the situation is often different for B2C businesses. B2B companies can reclaim VAT on their purchases when input VAT exceeds output VAT, making registration beneficial. However, B2C companies face challenges: increasing prices to cover VAT can make them less competitive while absorbing the VAT cost can reduce profitability. This dual disadvantage requires careful consideration before registering voluntarily.
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What is the UK VAT registration threshold?
The UK VAT registration threshold increased from £85,000 to £90,000 starting in the 2024/2025 tax year. Businesses must register for VAT if their taxable turnover exceeds this threshold in the past 12 months or if they expect to reach it within the next 30 days.
How do I become VAT registered?
To become VAT registered, you must sign in to HMRC Online Services and complete the application. The process is straightforward, and it typically takes HMRC around two weeks to process your application and issue your VAT registration number.
It’s important to note that you cannot charge or display VAT amounts on your invoices until you receive your VAT number. However, once your registration is complete, you can adjust your prices in preparation for charging VAT.
Once registered, you must file VAT Returns online every 3-month VAT period. These returns must be submitted to HMRC within one month and 7 days after the end of the VAT period. Payments to HMRC must also be made electronically, and the payment deadline is usually the same as the filing deadline.
Staying on top of these requirements ensures compliance and avoids penalties for late filings or payments.
See also: GOV.UK One Login Programme Explained!
