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What is the VAT registration threshold?

April 28, 2022This article was updated 22nd March 2023.With Making Tax Digital (MTD) for VAT now mandatory for all VAT-registered businesses, you might be wondering what this means for your business.If you fall into this bracket, rest assured. We’ll be diving into what the VAT registration threshold for the UK in the 2023/24 tax year is and what being VAT-registered means for your business.

What is the VAT registration threshold?

For most UK businesses, the VAT registration threshold for 2023/24 is £85,000.When you need to register your business for VAT depends on when your annual taxable turnover surpasses this threshold. However, your VAT threshold may look a little different depending on your business's unique circumstances. If your taxable turnover is less than the VAT registration threshold in a 12-month period, you won’t need to register.If this seems like a lot to wrap your head around, we've summarised the key points of this article in the video below.

How does VAT work?

After registering for VAT, you'll need to forward on the VAT collected on goods and services made from sales to HM Revenue and Customs (HMRC). As a consumer tax, the VAT owed increases with every value-add in the production chain.While a sales tax is only paid once at the final point of sale, VAT is paid every time the item is sold, starting with the manufacturer and ending with the customer. 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.

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.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.

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

With the Cash Accounting Scheme, you’ll only need to pay VAT on sales when your customers have paid you, and can reclaim VAT on purchases when you’ve paid your supplier.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.

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.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.

I didn't realise I went over the VAT threshold. What now?

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.Take for instance you surpassed the VAT registration threshold back in October 2021 but only realised in April 2022. If all your sales were on Standard Rate VAT items, you could go back and charge your clients an additional 20% on the invoices issued at the time, or bear the brunt of the charges and settle the outstanding amount yourself.If you think you should have been registered for VAT in previous years, the VAT thresholds from 1st April 2010 are as follows:

VAT registration exceptions

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.

Deregister from VAT

The VAT deregistration threshold for the 2023/24 tax year is £83,000. 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 VAT deregistration threshold, you can ask HMRC to cancel your VAT registration.

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.If HMRC realises that you shouldn’t have cancelled your VAT registration, they will automatically re-register you and expect you to account for any VAT you should have paid within that timeframe.