What is the VAT threshold?

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While it means more taxation for your business or company, it can also mean more profit for you. What do we mean by this? Keep reading.

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Answer Adeosun
Dec 30, 22 · min read
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To put it simply, the Value Added Tax threshold in the UK is £85,000. What that implies is that as soon as your business starts to make up to the threshold in taxable profit, you are required by the law to register it for the VAT scheme with the HMRC.

There are other rules guiding the application or registration for the VAT scheme that is quite important. However, there is no need to fret.

How VAT works in the UK

The most common VAT scheme is the one mentioned in the introductory part of this article. In that case, you should register your business if you begin to earn above the £85,000 threshold or hope to in the nearest future.

There are other VAT thresholds that you should be aware of

  1. You must register for VAT when your taxable turnover is £8,818 if you are selling goods to Northern Ireland.
  2. If you reside in Northern Ireland but want to bring in goods from other EU countries, your VAT threshold is £85,000.
  3. VAT accounting schemes – varying thresholds are depending on which of the schemes you are qualified or registered for.
    1. To join the Flat Rate threshold scheme, your taxable turnover must be £150,000 or less. But you must leave the scheme when your taxable turnover shoots over £230,000
    2. The Cash Accounting scheme has a threshold of £1.35 million or less but you must leave the scheme when it becomes £1.6 million or above.
    3. The Annual Accounting scheme is the last VAT accounting scheme and its thresholds are the same as that of Cash Accounting.
  4. VAT Retail Schemes – are another and the threshold, no matter which of the 3 schemes you are opting for, is £130 million. These schemes are for retailers and it makes calculating VAT tax simpler.
  5. VAT Margin Schemes – this scheme is good for people who sell second-hand goods, antiques, arts, and collector items. With this scheme, you only have to calculate the VAT tax you are due to pay the HMRC from the VAT that you added to each good at the point of sale and not the entire sale price. The eligibility for this scheme is if you are trading in the aforementioned goods.

It is important to note here that subscribing to any of the schemes has certain qualifications that your business must meet. Also, you cannot use both the accounting and retail schemes at the same time. It is either one or the other.

What is the importance of registering for the VAT scheme?

There are some reasons why registering for VAT or a VAT scheme may be good for your business, even if your annual taxable turnover is yet to reach the threshold. They include – 

  1. Access to the VAT Schemes – The VAT schemes such as the Flat Rate scheme allows businesses to pay a flat rate of VAT instead of the standard rate. 
  2. Saves money in tax payment
  3. Makes accounting for tax returns easier
  4. You have more credibility with your customers and you can attract more prestigious clients.
  5. You can reclaim your VAT by adding the appropriate amount to any goods or services sold.

When should you register your business for VAT?

You can register your business for VAT before you reach the required threshold as mentioned above if you want. There is no law against doing that because you are simply giving your business a more prestigious outlook and it can help you reduce how much you pay in tax since you can simply obtain your money back by charging your customers and clients VAT.

However, you must compulsorily register for VAT as soon as your annual taxable turnover reaches any of the VAT thresholds you want to apply for. If you do not, you can attract a fine from the HMRC or worse get jail time for tax evasion.

How and when can you start charging customers for VAT?

You can begin to charge your customers for VAT as soon as your VAT registration has been approved by the HMRC and you have been given your 9-digit VAT number. But you cannot charge anyhow. There are rules guiding how much you charge your clients as VAT. This is to ensure that people do not charge clients outrageously. 

Also, you cannot begin to charge your customers VAT until you have your VAT number. You are only allowed to increase the price of your goods to accommodate how much you will need to pay in VAT once it is time to do so.

Below are the guidelines that must be strictly adhered to for charging VATs from customers according to the HMRC.

  1. You can only charge 20% or below of the price of the goods as VAT. This applies to most goods and services.
  2. You can only charge 5% VAT for goods like home energy and children’s car seats.
  3. Zero VAT goods are VAT exempt, i.e., you cannot charge any VAT on these items. They are items like food, children’s clothes and shoes, motorcycle helmets, books, newspapers, most goods exported from Great Britain to another country or from Northern Ireland to the UK or non-EU countries, and from Northern Ireland to an EU VAT-registered business.

You can get more details on goods and services on which VAT is charged and VAT-exempt goods here.

Rules every VAT-registered business in the UK must adhere to

There are also rules that every VAT-registered business in the UK must strictly adhere to to avoid being penalised by the government. They are – 

  1. As a VAT-registered business, you must charge your customers for VAT on every good sold.
  2. You must also keep a record of every good on which you paid VAT for your business. In other words, if you also paid VAT to a supplier, within or outside the UK, you must take a detailed record of those.
  3. Make a VAT return to the HMRC, detailing how much VAT you charged your customers and how much VAT you paid every three (3) months.
  4. Make a payment of VAT owed to the HMRC. You calculate the amount of VAT you owe by deducting the total amount of VAT you paid from the total amount of VAT you charged. If the difference in how much you paid in VAT is lower than what you charged, then you will pay the difference to the HMRC. If otherwise, the HMRC will refund you.
  5. You must keep a record of VAT paid to you and by you for between 6 to 10 years depending on the VAT scheme your business is operating on.


How to register for VAT in the UK?

Here are the few steps:
HowTo step image

1. Register online

you can do this by simply login on to the HMRC website with your Gateway ID. If you do not have a Gateway ID already, you can register and get one on the website too. Your VAT number will usually be sent to your email within 5 working days.

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