Tax-related matters can be a tad intimidating – we get it. However, it does not have to be that way. For new business owners seeking to start a business in the UK, getting a hold of important terminologies and procedures such as VAT threshold helps you easily navigate your way through the region’s tax system.
In this article, we will be looking into UK’s Value-Added Tax (VAT) and at which point is your business legally required to obtain it. Plus, we will also go into the advantages of registering for VAT as well as the challenges it might pose to your business.
Determining the VAT threshold in the UK
The VAT threshold is the amount of money that a business can earn before being required to register for VAT. According to the latest threshold in the UK, if your company has a taxable turnover of more than £85,000 over the course of any consecutive 12-month period, you are required to register for VAT.
In the case where your business generates less than the threshold in turnover annually, you still have the option to register for VAT voluntarily.
Also, note that the normal UK registration threshold is no longer available to non-established taxable persons (NETPs) as of 1 December 2012. NETPs are required to register for VAT if they make taxable supplies in the UK.
How much has the VAT threshold changed in the UK?
Being aware of the yearly adjustment of the VAT threshold in the UK will help your business keep track of whether you should start preparing for VAT registration. Over the last decade, businesses in the UK had witnessed a steady rise in VAT threshold, particularly, the gateway amount was £77,000 in 2012 compared to the current sum of £85,000 in 2022. This amount was last modified in 2017 and is predicted to be adjusted in the years to come.
Below are the annual changes made to the VAT threshold announced by the UK government over the past 10 years:
- 2012-2013: £77,000
- 2013-2014: £79,000
- 2014-2015: £81,000
- 2015-2016: £82,000
- 2016-2017: £83,000
- 2017-2018: £85,000
- 2018-2019: £85,000
- 2019-2020: £85,000
The pros and cons of being voluntarily VAT-registered
As we have flagged at the beginning of the article, businesses in the UK can choose to be VAT-registered if their companies have not reached or exceeded the minimum amount required by the government. Certainly, this decision comes with its own opportunities and obstacles.
Opportunities of being VAT-registered
When considering being voluntarily registered for VAT, some of the following factors may impact your decision to lean towards it:
- You can apply VAT to the sale of virtually all goods and services.
- You can reclaim VAT on the vast majority of things purchased from other businesses.
- It might be advantageous for marketing purposes to indicate that pricing is inclusive of VAT since it will lend legitimacy to the firm in question.
- Enhancing your company’s credentials and creating a better first impression.
- Voluntary VAT registrants may backdate their registration by up to four years in order to recoup VAT paid on equipment they are now utilizing. However, you must provide HMRC with documentation of this.
Challenges that come with being VAT-registered
Despite the benefits of being a VAT-registered business, there are obstacles that include:
- You will need to charge more for your goods and services.
- If the majority of your customers are members of the general public, they will not be able to reclaim the VAT on your products and services.
- Once you register for VAT, administration and record-keeping will become more time-consuming.
- Due to the complexity of the VAT process, you may miss out on the benefits of being VAT-registered if you make even minor errors.
- Among the unanticipated expenses associated with VAT registration will be incurred.
A guide to VAT registration in the UK
You can use the online facility provided by HMRC to register for VAT on their website
In order to proceed with the online registration, you will be asked to create a VAT online account or sometimes referred to as a Government Gateway account. This is required in order for HM Revenue and Customs (HMRC) to accept your VAT Returns.
You have the option of appointing an accountant (or agent) to handle HMRC interactions and the submission of your VAT Returns on your behalf. When you have your VAT number, you can still sign up for a VAT online account by selecting the option that says “VAT submit returns.” This is possible even if you are employing an agent.
Contact us to get a head start on your VAT registration process, we will provide you with details and assistance regarding the application. Plus, you can explore our company formation package for further assistance.
Alternately, you may be required to write to HMRC using their VAT1 form if you fall under the categories below:
- You are applying for a “registration exception”
- You are entering the Agricultural Flat Rate Scheme
- You are filing for the divisions or business units of a corporation under different VAT numbers
After completing the registration, HMRC should send you an official certificate within two weeks.
What if your business only reaches the VAT threshold temporarily
If your company’s taxable revenue temporarily exceeds the VAT registration level, you may not be required to register for VAT. You can instead apply for an “exception” to your registration.
You are eligible for an exception if you can demonstrate to HMRC that your taxable turnover will remain below the VAT deregistration threshold for the following 12 months.
VAT accounting schemes
There is a range of VAT accounting schemes that allow firms to manage their VAT in a variety of ways. Each of these schemes has its own set of VAT thresholds.
The VAT thresholds for accounting systems operate significantly differently than the VAT registration threshold. Unlike the VAT registration threshold, which requires firms to register for VAT if their taxable turnover exceeds a particular amount, VAT accounting schemes are voluntary, and the thresholds for each scheme establish the maximum amount a company must earn to participate in the scheme.
The VAT Flat Rate Scheme is a method for businesses to pay VAT in which they pay HMRC at a predetermined rate.
To qualify for the VAT Flat Rate Scheme, your taxable revenue must be less than £150,000. If you are a participant in the Flat Rate Scheme, you are required to depart once your annual revenue exceeds £230,000.
VAT cash accounting scheme
The VAT Cash Accounting Scheme adheres to the principles of cash accounting, which means that VAT is recorded and paid when money is exchanged, as opposed to when an invoice is given or received.
To be eligible for the VAT Cash Accounting Scheme, your VAT-taxable turnover must be less than or equal to £1.35 million. There is a mandatory deregistration threshold, and if your taxable turnover exceeds £1.6 million, you are not eligible for the scheme.
Annual accounting scheme
Businesses are only required to file one VAT Return per year according to the Annual Accounting VAT Scheme, and they are allowed to make advance payments toward their VAT liability.
If your VAT taxable turnover is less than or equal to 1.35 million pounds, you are eligible to participate in the plan. When their annual sales reach the deregistration level of £1.6 million, businesses that have been participating in the Annual Accounting VAT Scheme are required to exit the scheme.
Further notice on UK’s VAT regulation after Brexit
The United Kingdom was a member of the EU VAT regime both before and throughout the transition period that followed Brexit. This meant that a business in the United Kingdom did not need to register for VAT in each country within the EU. Rather, they applied a standard set of laws that were related to VAT.
In addition to this, it meant that firms in the UK were able to make use of a variety of VAT simplifications, including distance selling thresholds and the online VAT refund process.
However, beginning on January 1, 2021, firms in Great Britain began treating countries within the EU in the same manner that they had previously treated countries located outside of the EU.
The terminology associated with the VAT has been updated properly. Following Brexit, the UK is also no longer subjected to the EU’s minimum VAT rate of 15%.
Again, in order to be consistent with trade with non-EU nations, the terms “dispatches and acquisitions” are being phased out in favor of “imports and exports” when referring to transactions involving EU countries. This modification in customs procedure also requires businesses to obtain an EORI number when they wish to transport goods from the UK to the EU and vice versa.
Another fallout of Brexit is the fact that postponed VAT accounting has been implemented in the United Kingdom. This implies that import VAT can now be disclosed and recovered on the same return, rather than having to pay it in advance and then collect it later, which is a method that is less efficient.
Should your new company register for VAT?
The appropriate answer for this will rely not only on the kind of company that you run but also on a wide range of other considerations, such as the following:
- Whether or whether your customers are registered for VAT
- How much do your VAT-related costs?
- What would the total increase be if you raised your prices without driving a significant portion of your customers away?
- If becoming VAT-registered would afford your company improved chances, you should do so
There is a good chance that you won’t need to register for VAT right away if you’re just getting your brand-new business off the ground. Before you start to worry about things like VAT threshold, it would be in your best interest to get your bearings and figure out who your core customers are.
If becoming VAT registered is something you’re thinking about doing, it’s a good idea to talk to a professional financial advisor who can help you make a list of the benefits and drawbacks specific to your particular business model.
Choosing to register for VAT is not something that should be done on a whim, make sure you think it through and make decisions you won’t regret later.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
- Determining the VAT threshold in the UK
- How much has the VAT threshold changed in the UK?
- The pros and cons of being voluntarily VAT-registered
- A guide to VAT registration in the UK
- What if your business only reaches the VAT threshold temporarily
- VAT accounting schemes
- Further notice on UK’s VAT regulation after Brexit
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