Will the new VAT thresholds affect your business?

VAT or Value Added Tax is charged on goods and services provided by businesses at the point of sale. If you’re registered for VAT, you must charge the right rate when providing goods or services to your customers. Then you must pay the VAT collected to HMRC, less any VAT you have paid to other businesses. 

 

The standard rate of VAT is 20% although VAT for some goods and services is charged at 5% and 0%. 

 

It’s more complicated when your business imports and exports goods. When you buy from outside the UK you must pay import VAT. For services received from overseas there’s a reverse charge. 

 

If your business turnover is or will soon reach £90,000 per year, you must register for VAT. This is an increase from £85,000. 

 

When you charge VAT for your goods or services you must include the details in your customers’ invoices. 

 

The higher VAT registration threshold means fewer small businesses have to register for VAT this year. The government says up to 28,000 small businesses could postpone VAT registration. However, inflation means many businesses could reach the threshold sooner than they expect. 

 

Registered businesses must keep their financial records up to date. In most cases you’ll submit VAT returns every quarter which involves quite a lot of administration. You’ll pay extra bookkeeping and accountancy fees to keep everything organised. You’ll also need to meet the requirements for Making Tax Digital for VAT, using compatible software. 

 

Mistakes and late submissions can lead to fines and penalties from HMRC. 

 

If your turnover is more than £85,000 but less than £90,000 you won’t have to register for VAT. You can consider two options: 

 

Deregistering for VAT. For businesses already registered for VAT the deregistration threshold has gone up from 83,000 to £88,000. If your business turnover drops below £88,000 you don’t have to remain registered for VAT. However, you must ask HMRC to cancel your registration within 30 days. You can’t simply stop submitting VAT returns and making your payments. 

 

Voluntary registration for VAT. For some businesses VAT registration is a good idea, even if turnover is below the threshold. This allows you to claim the VAT you pay for goods or services and your business appears more established. If most of your customers are VAT registered, they can offset the VAT you charge against their own VAT payments. With enough evidence, it’s sometimes possible to backdate voluntary registration for up to four years. 

 

If paying your quarterly VAT bill affects your cashflow, you might want to consider a private credit arrangement which you can pay in monthly instalments. You could also use this credit to buy stock and pay invoices too. You can ask HMRC about Time to Pay arrangements. However, this is only a good idea if you expect your cashflow to improve quickly.