What is the VAT threshold?

Xero

Xero does all the hard work for you, including calculating your VAT according to your scheme (flat rate, cash etc.), automatically making adjustments based on your invoices and bills data, and filing your return.

What if it’s just a blip?

It’s possible that your business will cross the VAT threshold but only on a temporary basis. Therefore, it’s possible to request your small business has a registration “exception”, which means you don’t need to register for VAT.

This VAT registration exception is something you must apply for – it’s not enough to say nothing and argue the case later.

Write to HMRC and explain the circumstances as to why your are applying for permission not to register. Reasons for not registering for VAT, even if you have crossed the VAT threshold, include:

• • Crossing the VAT threshold was a one-off event

• • That there’s no likelihood of your crossing the VAT threshold again in the near future

You will also need to supply supporting documents to support your case.

Pro tip: Even if HMRC accepts your application for a VAT exception, remember that it is a one-off and not an ongoing exclusion. You’ll still need to register for VAT if your turnover again exceeds the VAT threshold.

Registering for VAT voluntarily

You can still register for VAT voluntarily, even if your taxable turnover does not exceed the VAT registration threshold of £90,000.

The advantage of this is that you become cheaper if you’re customers are also registered for VAT. They can claim VAT back on whatever they buy from you, saving them 20 per cent compared to if you weren’t registered for VAT.

It is estimated that around 20 per cent of all VAT-registered businesses trade below the VAT registration threshold.

Also, if you’re just starting up and you know that you’re quickly going to hit the £90,000 VAT threshold, or that you will be mostly selling to VAT-registered businesses, you can claim your VAT on the costs of setting up – saving you money in the short term.

Do grants count towards VAT threshold?

Grant funding is typically outside the scope of VAT. However, if the funder receives a supply in return, some payments, which can be called ‘grants’, do count if they’re consideration for a supply.

How do I pay VAT to HMRC?

Of course, you could just hold your nose and hand 20 per cent of your turnover over to the taxman but there are legitimate and official ways to reduce you VAT bill and smooth out payments to help cashflow:

• • Flat Rate Scheme – If your annual turnover is less than £150,000, you may join this scheme to pay VAT to HMRC at a fixed-rate percentage of turnover, depending on industry. VAT rates under the Flat Rate Scheme range from 4 per cent to 14.5 per cent compared with 20 per cent standard rate. If you’re part of the Flat Rate Scheme, you must leave once your turnover goes above the compulsory deregistration threshold of £230,000.

• • VAT Cash Accounting Scheme – This works similarly to regular cash accounting, where VAT is paid and recorded when money changes hands, rather than when an invoice is received. To join the VAT Cash Accounting Scheme, you must have a VAT taxable turnover of £1.35 million or less. There’s a compulsory deregistration threshold, and you must leave the scheme if your taxable turnover is more than £1.6 million.

• • Annual Accounting Scheme VAT – Under the Annual Accounting VAT Scheme, businesses submit one VAT Return per year and make advance payments towards their VAT bill. You can join the scheme if your VAT taxable turnover is £1.35 million or less. Companies participating in the Annual Accounting VAT Scheme must leave when their turnover crosses the £1.6 million deregistration threshold.

How to stay under the VAT threshold

If you’re a tradesman especially, having to charge your customers an additional 20 per cent is not very palatable – it puts you at a disadvantage compared with rivals.

One way to stay under the threshold is to split your business into two or more separate businesses, according to Checkatrade, but each part of your company needs to offer different services to make the distinction clear. Having separate bank accounts for each business is also helpful. However, there has to be a legitimate reason for doing the split. If HMRC suspects artificial splitting, you could be hit with back-dated VAT and penalties. 

Sole traders increasingly avoid charging VAT – Tens of thousands of small businesses deliberately stay small to avoid charging VAT, which means you have to hike prices if you wander over the £90,000 threshold

More on VAT

Import duty and zero VAT rated goods – If I want to import zero VAT-rated goods, will I still have to pay import taxes on them? Where can I find more information about this?