The value add tax (VAT) threshold for businesses operating within the UK is set at £85,000 for the tax year 2022/23.
Any business with an annual taxable turnover of £85,000 or above must be VAT registered. Businesses with an annual taxable turnover below £85,000 are also able to voluntarily register for VAT, but have no obligation to do so.
By registering for VAT, businesses must add the additional rate of VAT to the price of goods and services sold (where applicable).
Moreover, they will also need to submit VAT returns every three months. Depending on the business’s level of taxable expenditure and revenue, either a payment will need to be made to HMRC or the company will be able to receive a VAT rebate.
Why is the VAT Threshold £85,000 in the UK?
The VAT threshold exists in order to lessen the administrative burden for small businesses in the UK.
Not only does this protect small businesses from having to pay tax on income that they might have not already received, but it also helps to keep the price of their goods and services competitive, with no requirement to add the 20% VAT rate to the final cost.
Is VAT Always 20% in the UK?
The rate of VAT is not always 20% in the UK.
Some goods and services are fully exempt from VAT, such as lottery ticket sales. Others require some VAT to be paid; however, this might be at a reduced rate. An example of this is the sale of mobility aids for the elderly, where the rate of VAT applicable is 5%.
To check out VAT rates on different goods and services, click here.
What are the Advantages of Registering for VAT?
Although businesses with an annual turnover less than £85,000 are not compelled to register for VAT, many still do, for reasons such as:
- The business believes that taxable turnover might reach the VAT threshold over a 12 month period
- Reclaiming VAT paid on goods and services for the business
- Mirroring other businesses operating within their space
- Helping to build the perception of legitimacy and credibility
- Getting ready for business growth in the future
- A reason to perform quarterly financial bookkeeping
What are the Disadvantages of Registering for VAT?
If you are not compelled to register for VAT, yet still decide to voluntarily register, you need to ensure that you stay on top of the administrative burden.
Additionally, you need to be abreast of fines and penalties that may be issued if you fail to stay up-to-date with your VAT compliance.
Every three months, there will be a specific date by which you will need to have filed your VAT return and paid any VAT due to HMRC for the timeframe in question.
Best Practice for Staying on Top of Business Expenses
As a small business, being organised really does pay off. Spending a little bit of time each week to ensure your finances are in order will likely save you time, money and stress down the line.
Tips for keeping on top of your business expenses:
- Set a budget at the beginning of the year, factoring in a little bit of working capital for unforeseen expenses
- Have a separate business account for your company’s transactions
- Utilise accounting software, such as Xero or Quickbooks
- Save invoices to a specific folder on your computer and take photos of all business receipts
- Do an audit of your transactions each month, to ensure you’re keeping as close to your original budget as possible
How Do I Register for VAT?
Registering for VAT is relatively straightforward. You’re able to do this online through the HMRC website, or alternatively, you can apply over the phone or by post.
The process is quick and simple. Once registered, your business will receive a 10 digit VAT registration number. This will need to be included on all invoices and receipts that you send to customers.
Before you register for VAT, you will need to provide HMRC with the information, such as:
- Business name and address
- Contact details
- Description of goods and services provided
- Bank account details
- Estimation of turnover for the next 12 months
Small businesses access unsecured, fast funding from Got Capital. As an alternative lender, Got Capital offers financing solutions specifically designed for and catered to the needs of SMEs.
