We realize that dealing with tax-related issues might be a little scary. That is not necessarily the case, though. Understanding key terms and procedures, such as the VAT threshold, can make it easier for new business owners to get their venture off the ground in the UK.
The UK's Value-Added Tax (VAT) and when your company is legally compelled to obtain it will be the topics of this essay. Additionally, we will discuss the benefits of filing for VAT as well as any difficulties it can present for your company.
Source: https://bbcincorp.com/offshore/articles/uk-vat-threshold
The UK's VAT threshold is determined
A business can earn up to a certain amount before having to register for VAT, which is known as the VAT threshold. According to the most recent threshold in the UK, you must register for VAT if your business has a taxable turnover of more than £85,000 over any consecutive 12-month period.
If the yearly revenue of your company is below the threshold, you still have the choice to voluntarily register for VAT.
Also, take note that, as of December 1, 2012, non-established taxable persons (NETPs) are no longer eligible for the standard UK registration threshold. When making taxable supplies in the UK, NETPs must register for VAT.
The VAT threshold in the UK has changed how much?
Your company will be able to monitor if you need to start making preparations for VAT registration by being informed of the annual adjustment of the UK VAT threshold. Businesses in the UK have seen the VAT threshold steadily climb over the past ten years; in particular, the threshold value increased from £77,000 in 2012 to £85,000 in 2022. It's expected that this sum will change in the years to come. The previous change was made in 2017.
The UK government has announced the following annual modifications to the VAT threshold during the previous 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
Advantages and disadvantages of choosing to register for VAT
Businesses in the UK have the option to choose to register for VAT even if they fall below or surpass the government's minimal threshold, as we have mentioned at the beginning of the article. There are undoubtedly advantages and disadvantages to this choice.
Options for registering for VAT
A few of the following elements may influence your decision to lean towards voluntary VAT registration:
- Almost all sales of goods and services are subject to VAT.
- The bulk of items you buy from other businesses are eligible for VAT refunds.
- Indicating that pricing includes VAT may be useful for marketing reasons because it will give the company's position more credibility.
- Improving the credentials of your business and making a better impression.
- To recover VAT paid on equipment they are already using, voluntary VAT registrants may backdate their registration by up to four years. However, you are required to give HMRC proof of this.
Being registered for VAT has its drawbacks
Having a VAT registration comes with advantages, but there are drawbacks as well, such as:
Your prices for goods and services will need to increase.
The general public cannot reclaim the VAT on your goods and services if the bulk of your clients are from that group.
Administration and record-keeping requirements will increase after you register for VAT.
You risk losing out on the advantages of becoming VAT-registered if you commit even a small error given how complicated the VAT procedure is.
The cost of VAT registration will include certain unexpected costs.
A guide to VAT registration in the UK
HMRC offers an online registration tool for VAT on their website.
You will be required to open a VAT online account, also known as a Government Gateway account, in order to continue with the online registration. This is necessary for HM Revenue and Customs (HMRC) to accept your VAT Returns.
You can choose to assign an accountant (or agent) to communicate with HMRC on your behalf and submit your VAT returns. When you have your VAT number, you can still register for a VAT online account by choosing the "VAT submit returns" option.
In the alternative, if you fall into one of the following categories, you might be obliged to write to HMRC using their VAT1 form:
- Invoking a "registration exception," you are applying.
- You're now a part of the Agricultural Flat Rate Scheme.
- With several VAT numbers, you are submitting paperwork for a corporation's divisions or business units.
- HMRC should send you an official certificate two weeks after you've finished the registration process.
What if your company's VAT threshold threshold is only momentarily reached?
You might not be required to register for VAT if your company's taxable revenue momentarily surpasses the registration threshold. A "exception" to your registration may be requested instead.
If you can show HMRC that your taxable turnover will remain below the VAT deregistration threshold for the ensuing 12 months, you are eligible for an exception.
Systems for recording VAT
Numerous VAT accounting plans exist, allowing businesses to manage their VAT in a number of different ways. There are distinct VAT thresholds for each of these programs.
The VAT thresholds for accounting systems function very differently from the VAT registration threshold. Unlike the VAT registration threshold, which forces businesses to register for VAT if their taxable turnover exceeds a specific amount, VAT accounting schemes are optional, and the thresholds for each scheme define the highest amount a business must earn to participate in the scheme.
Flat rate
The VAT Flat Rate Scheme allows businesses to pay VAT to HMRC at a set rate.
Your taxable income must be less than £150,000 to be eligible for the VAT Flat Rate Scheme. Once your yearly income surpasses £230,000, you must stop participating in the Flat Rate Scheme.
Scheme for VAT cash accounting
Since the VAT Cash Accounting Scheme follows the rules of cash accounting, VAT is calculated and paid when money is exchanged rather than when an invoice is issued or received.
Your VAT-taxable turnover must be under £1.35 million in order to qualify for the VAT Cash Accounting Scheme. There is a mandatory deregistration threshold, and you are ineligible for the program if your taxable turnover exceeds £1.6 million.
Scheme for yearly accounting
The Annual Accounting VAT Scheme permits businesses to make advance payments toward their VAT tax and only requires them to submit one VAT Return annually.
Your VAT taxable turnover must be less than or equal to 1.35 million pounds in order for you to be eligible to participate in the plan. Businesses that have been a part of the Yearly Accounting VAT Scheme must leave the scheme whenever their annual sales reach the deregistration level of £1.6 million.
More information regarding UK VAT regulation following Brexit
Prior to Brexit and throughout the subsequent transition period, the UK was a participant in the EU VAT system. Because of this, a company operating in the UK was exempt from having to register for VAT in every EU member state. Instead, a set of uniform legislation pertaining to VAT were applied.
In addition, it meant that businesses in the UK could benefit from a number of VAT simplifications, such as distance selling thresholds and the online VAT refund procedure.
But starting on January 1, 2021, businesses in Great Britain started treating EU member states the same way they had been doing so previously.
The VAT-related terminology has been correctly amended. With Brexit, the EU's 15% minimum VAT rate is no longer applicable to the UK.
Again, when referring to transactions involving EU countries, the words "dispatches and acquisitions" are being phased out in favor of "imports and exports" in order to be consistent with trade with non-EU countries. Businesses must now obtain an EORI number in order to transfer products from the UK to the EU and vice versa as a result of this amendment to the customs procedure.
The United Kingdom has implemented postponed VAT accounting, which is another effect of Brexit. This implies that import VAT is no longer need to be paid in advance and then collected later, which is a less effective practice, and can instead be revealed and recovered on the same return.
Should you register your new business for VAT?
The right response to this will depend not just on the type of business you run but also on a wide range of other factors, including the following:
- Whether your clients have registered for VAT or not
- How much do your costs for VAT?
- What would the overall increase be if you increased your pricing without losing a sizable percentage of your clientele?
- If registering for VAT would increase your company's chances, you should do so.
If you're just starting your brand-new firm, there's a high possibility you won't need to register for VAT straight away. It would be in your best interest to gain your bearings and identify who your main clients are before you begin to worry about things like the VAT threshold.
Conclusion
Talking to a qualified financial advisor who can assist you in compiling a list of the advantages and disadvantages unique to your particular business model is a smart idea if becoming VAT registered is something you're considering doing.
It is not advisable to choose to register for VAT on a whim; instead, carefully consider your options and choose a course of action that you won't regret.
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