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What is the VAT registration threshold?

April 28, 2022
With Making Tax Digital (MTD) for VAT now mandatory for all VAT-registered businesses, you might be wondering what this means for your sole trader business.
While MTD-ready software (such as Ember) makes it easy for businesses to file their tax returns electronically, there’s still a level of uncertainty around when small businesses need to register for VAT, how much they’ll need to charge and if there’s any benefit to being registered for VAT in the first place.

If you fall into this bracket, rest assured. We’ll be diving into what the VAT registration threshold for the UK in 2022 is and what being VAT-registered means for your business.

What is VAT?

Before we dive into the specifics surrounding VAT, we’ll first outline what VAT — Value Added Tax — actually is.

Paid by both businesses and consumers, VAT is a consumer tax paid to HM Revenue and Customs (HMRC) on goods and services, with the tax owed increasing with every value-add in production.

Diagram showing how input VAT and output VAT work
The VAT you owe can be calculated by subtracting the VAT you paid to the supplier, or the input VAT, from the VAT paid by the customer, the output VAT. To get an idea of how much VAT you'll need to charge your customers with every sale, check out the Ember VAT calculator.

In every stage, VAT is usually forwarded onto the customer. In doing so, companies can reclaim the VAT they pay to the government by submitting a VAT return. Once submitted, you’ll usually receive a refund within 10 working days of HMRC receiving your return, although this may take longer.

What is the VAT registration threshold?

For the majority UK businesses, the VAT registration threshold is £85,000.Since 1st January 2021 the VAT registration thresholds are as follows:
CircumstanceThreshold
VAT registrationMore than £85,000
Registration for distance selling into Northern IrelandMore than £70,000
Registration for bringing goods into Northern Ireland from the EUMore than £85,000
Deregistration thresholdLess than £83,000
Completing simplified EC Sales List£106,500 or less and supplies to EU countries of £11,000 or less
Source: gov.uk

The UK VAT thresholds are based on your VAT taxable turnover — the total value of everything sold or supplied that isn’t VAT exempt.If your business does not surpass the VAT registration threshold over a 12-month period, you won’t need to register.

Can I register for VAT before I reach the VAT threshold?

While business owners don’t have to register for VAT until their annual turnover is more than £85,000, they can register voluntarily if they wish to do so.In voluntarily registering, businesses with an annual taxable turnover below this threshold can reap the benefits of being a VAT-registered business.Note: If you plan on registering voluntarily, keep in mind that as of 1st April 2022, MTD for VAT became mandatory for all VAT-registered businesses, not just those above the VAT-registration threshold.

Benefits of VAT-registration

One of the main reasons business owners voluntarily register for VAT is to reap the financial benefits claimed by businesses earning above the VAT threshold. For starters, businesses registered for VAT are able to reclaim the VAT they’ve been charged by other businesses.This is particularly beneficial for businesses who are charged VAT by their suppliers — as long as the VAT the business goes on to charge their customers is less than the amount they are paying their suppliers, they’ll be able to reclaim the difference in their VAT return.VAT-registered businesses also benefit from looking more established. While being VAT-registered hints that your business’s annual turnover could be above £85,000, not being VAT registered confirms that this isn’t the case. In suggesting that your taxable turnover is above the VAT threshold, customers and suppliers are more likely to view your business as credible.

Drawbacks of VAT-registration

Before voluntarily registering for VAT, you might want to take a look at how this will affect your customers first.
If you’re a supplier and sell to businesses that aren’t VAT registered, you might find that your invoices suddenly increase by up to 20% (20% being the standard rate of VAT — depending on the goods or services you sell, you might only need to charge the reduced rate of VAT at 5%). Since you can only reclaim VAT if you’re a VAT-registered business, your clients might not be able to reclaim the VAT fee, and as a result may seek out a cheaper, non-VAT registered supplier instead.

Similarly, if you sell directly to consumers, long-term customers might notice the price rise and may be tempted to shop elsewhere. To counter this possibility, you might decide not to pass the full amount on to your customers and shoulder some of the cost yourself, or lower your prices to ensure your price changes aren’t too drastic.
Finally, a lot of businesses may be deterred by the extra paperwork and additional deadlines they’ll need to keep up with. With Ember, however, not only will we ensure you stay on top of your deadlines with automated reminders, but you can also effortlessly file your VAT returns to HMRC directly from the app.

VAT accounting scheme thresholds

For businesses that don’t benefit from the standard VAT process, HMRC offers a handful of alternative ways to collect VAT, through what are known as VAT accounting schemes.

Flat Rate Scheme

Under the standard VAT process, the amount of VAT a business pays to or claims back from HMRC is the difference between output VAT and input VAT (scroll up for a refresher of what these terms mean).On the Flat Rate Scheme, however, you pay a fixed rate of VAT to HMRC and keep the difference between what you charge your customers and what you pay to HMRC.However, on this scheme you’re no longer able to reclaim VAT on business purchases, except for certain capital assets that amount to over £2,000.To join the scheme, you must be a VAT-registered business expecting a taxable turnover of £150,000 or less in the next 12 months. You must also not have:
    Left the scheme in the last 12 monthsCommitted a VAT offence in the last 12 months (e.g. VAT evasion)Joined (or been eligible to join) a VAT group in the last 24 monthsRegistered for VAT as a business division in the last 24 monthsBeen closely associated with another businessJoined a margin or capital goods VAT scheme
If you’re no longer eligible, expect to make £230,000 (including VAT) in the next 30 days or have an annual turnover above £230,000 on the anniversary of joining, you must leave the scheme.

Cash Accounting Scheme

To join this scheme, you’ll need to have a VAT taxable turnover of £1.35 million or less in the next 12 months. You also must:
    Not be on the VAT Flat Rate SchemeBe up to date with your VAT returns and paymentsNot have committed a VAT offence in the last 12 months (e.g. VAT evasion)
You also cannot use the Cash Accounting Scheme for the following transactions, where you’ll be required to use standard VAT accounting instead:
    The payment terms of a VAT invoice are 6 months or moreA VAT invoice has been raised in advanceWhen buying or selling goods using lease purchase, hire purchase, conditional sale or credit saleWhen important goods into Northern Ireland from the EUWhen moving goods outside a customs warehouse
If your VAT taxable turnover exceeds £1.6m, you must leave the scheme.

Annual Accounting Scheme

While most VAT-registered businesses file their VAT returns 4 times a year, businesses on the Annual Accounting Scheme only submit once annually.Businesses on this scheme also make advance VAT payments towards their VAT bill, with the amount they owe based on their last return, or their estimated return if they’re new to VAT.When you submit your VAT return, you either need to make a final payment which is the difference between your advance payments and actual VAT bill, or apply for a refund if you’ve overpaid.If you regularly reclaim VAT on purchases, you’ll most likely be better suited to a different scheme since you can only get your refund when you submit your VAT return. As a result, on this scheme you’ll only get 1 VAT refund a year.You can join the scheme if your estimated VAT taxable turnover is £1.35 million or less, and must leave if your turnover exceeds £1.6 million.
Threshold to join schemeThreshold to leave scheme
Flat Rate Scheme£150,000 or lessMore than £230,000
Cash Accounting Scheme£1.35 million or lessMore than £1.6 million
Annual Accounting Scheme£1.35 million or lessMore than £1.6 million
Source: gov.uk

When do I need to register for VAT?

As soon as your business is making an annual taxable turnover above £85,000, or if you know that in the next 30-day period it will, you’ll need to register for VAT.If you realise that you’ll go over the VAT threshold in a 30-day period, you must register by the end of that 30-day period. The start of your 30-day window is known as your effective date of registration and is the date that you realised you’ll go over the VAT registration limit, not the date your turnover went over the threshold.For example: if on 1st May you realise your VAT taxable turnover will push you over the threshold, you’ll need to register your business for VAT by 30th May.If you’ve exceeded that VAT threshold in the past 12 months, you’ll need to register for VAT within 30 days of the end of the month where you went over the threshold. In this instance, your effective date of registration is the first day of the second month after you go over the VAT threshold.For example: if your VAT taxable turnover was £100,000 between 10 July 2021 and 9 July 2022, you’ll need to register for VAT by 30th August 2022. Your effective date of registration in this scenario is 1st September 2022.To avoid any issues when registering for VAT, we recommend checking in on your taxable turnover on a regular basis. Take for instance you surpassed the VAT registration threshold back in October 2021 but only realised in April 2022. While you’re not at risk of incurring any late registration penalties, you will need to go back and add VAT to the invoices you’d raised from the date you surpassed the threshold. To balance out what you owe in VAT, you can either charge your clients an additional 20% or bear the brunt of the charges yourself.If you sell VAT-exempt goods or services and are based in Northern Ireland, you’ll only need to register if you sell goods or services that are exempt from VAT or are ‘out of scope,’ but buy goods for more than £85,000 from EU VAT-registered suppliers to use in your business.

Can I get avoid registering for VAT?

You can only apply for a registration ‘exception’ if your taxable turnover goes above the VAT registration threshold temporarily.To do this, you’ll need to write to HMRC with evidence as to why you think your VAT taxable turnover will not go over the deregistration threshold (£83,000) in the next 12 months.If HMRC confirms your appeal, they’ll write to you acknowledging your application for exception. If they reject your application, they’ll register you for VAT.Not registering for VAT is you go above the registration threshold is not an option. Failure to register without an exception from HMRC could see you face a late registration penalty, starting at a minimum of £50.The total penalty is calculated as a percentage of the VAT due from when you should have registered, with the penalty rate dependent on how late you were to register.
If you registered...Then the penalty rate will be...
No more than 9 months late5%
More than 9 months but no more than 18 months late10%
More than 18 months late15%
Source: gov.uk

Deregister from VAT

If you’re no longer eligible to be VAT-registered, you must cancel your VAT registration within 30 days or face a penalty.Alternatively, if you voluntarily registered for VAT and fall below the deregistration threshold of £83,000, you can ask HMRC to cancel your VAT registration.
You can cancel your VAT registration online through your Government Gateway account or by filling in and sending form VAT7 through the post.

It usually takes up to 3 weeks for HMRC to confirm your cancellation and the official date of your cancellation. This can either be the date when your reason for cancelling came into effect, or the date you asked to cancel if you had registered voluntarily.Once HMRC has confirmed your cancellation, they will send confirmation to either your VAT online account or through a letter in the post. From the official date of your cancellation you must stop charging VAT immediately.After you’ve cancelled, you’ll need to keep ahold of your VAT records for 6 years.To officially mark the end of your time being VAT-registered, you’ll have to submit a final VAT return for the period up to and including the cancellation date. You’ll also need to account for any stock or assets you have on this date if you could reclaim VAT on them when you bought them, or if the total VAT due on these assets amounts to more than £1,000.

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