Approaching the VAT Threshold? Here’s what you need to know

Many business owners only realise they’ve crossed the VAT threshold after the fact, which can get expensive!

If your turnover is growing, VAT registration is on the horizon, and it often brings more complexity than most business owners expect, but don’t panic!

Whether you’re approaching the threshold for the first time or simply want to make sure you’re doing things right, here’s everything you need to know about how to stay ahead.

What is the VAT registration threshold?

Value Added Tax (VAT) is a tax added to most products and services sold by VAT-registered businesses.

The current registration threshold is £90,000. (HMRC review this throughout the year the the various budgets so can be subject to change)  

This means that if your business exceeds £90,000 in revenue over a rolling 12-month rolling period (not necessarily the company's year-end), then you must register for VAT. The guidance from HMRC is

“You must register for VAT when you become aware your turnover is going to exceed £90,000 threshold in a rolling 12-month period in the next 30-days"

For example, if by your year-end your revenue was £75,000, but in the next month you had strong sales that brought it to £150,000, you would need to register for VAT.

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How do you know you’re getting close to the VAT threshold?

The only way to track whether you’re approaching the VAT threshold is to have visibility of your finances and income.

Regular bookkeeping and up-to-date accounting software mean that you can track your rolling 12-month turnover month by month, rather than finding out later, giving you an early warning sign well before you reach the threshold.

Why register for VAT early?

Registering for VAT before you reach the £90,000 threshold is not mandatory, but early registration offers real advantages, including:  

• Enabling you to reclaim VAT on your purchases
• Making your business appear more established to clients and suppliers
• Avoiding the shock of suddenly having to add 20% to your prices once registration becomes unavoidable.

What happens if you don't register for VAT in time?

If you miss the deadline for registering for VAT once you're passed the threshold, HMRC can charge penalties. Plus, there may be a backdated VAT liability, meaning you may end up owing VAT on sales even though you never charged your customers for it. Though fixable, this requires quick action and proper advice!

Making Tax Digital for VAT

When you register for VAT, you automatically fall within the scope of Making Tax Digital (MTD).

You’ll need to maintain digital records and submit VAT returns using approved software.

The best time to get your bookkeeping in shape is before you register – not after. So if you’re not yet using cloud accounting software, now is a good time to start.

Since HMRC are moving towards digitising all taxes, this will only become more relevant.

Common VAT registration mistakes to avoid

Beyond, of course, not registering in time, the most common slip-ups are in the details.

While most businesses are eager to get the basics right, such as charging the correct VAT rate and issuing compliant invoices, they pay less attention to the details. This includes attempting to reclaim VAT on purchases to which VAT was never applied or not having the right software subscription level to handle VAT properly.

Preparing for VAT registration: A quick checklist

To ensure you're well prepared for VAT registration and the subsequent reporting obligations this brings, we recommend the following proactive steps.

• Calculate your rolling 12-month turnover right now, even if you aren't imminently approaching the VAT threshold.
• Set yourself an alert at around the £80,000 turnover mark to make sure you are considering VAT before you need to, not after.
• Review your pricing and consider how you will be factoring VAT in. Will you simply absorb the VAT or will you pass it on to customers?
• Understand the various VAT schemes available and decide which is most suitable for your business.
• Speak to a qualified accountant with experience in VAT before you register. They will be able to advise you on all of the above.

Getting ahead of VAT

Approaching the VAT threshold is a sign that your business is succeeding and growing. The process of VAT registration can be stressful, but it doesn't have to be. All it requires is attention and planning.  

If your turnover is growing towards the VAT threshold of £90,000 and you’re unsure where you stand, what to do next, or have any related questions, get in touch with our team. Gravitate has helped hundreds of companies figure out their VAT position and ensure they are well prepared.

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