The VAT threshold explained

The VAT threshold is currently £90,000. Businesses with a turnover of less than £90,000 over the last 12 months do not have to register for VAT, but they may still register if they wish to.

Misconception #1: The VAT threshold applies to the tax year – incorrect!

A common misconception is that the VAT threshold applies to the financial or tax year – it most certainly does not. It applies to any ‘rolling 12 month period’, so if you are concerned about going over it you should check your sales for the last 12 months at the end of each month.

Misconception #2: Only companies have to register for VAT – wrong!

Sole traders, partnerships and individuals must register for VAT if they reach the VAT threshold.

Misconception #3: The VAT office or my accountant will tell me when I need to register – very untrue!

Neither are likely to know your exact turnover in real time, so this is your responsibility as the sole trader or director. You will need to register within 30 days of the end of the month when you exceeded the threshold. So if you exceed the threshold in October, you must register by 30th November, and you will be registered for VAT from 1st December.

Misconception #4: I will make less money if I register for VAT – often true but can also be false!

Many businesses are better off registering for VAT before they hit the threshold. If you trade primarily in zero rated goods, for example, or if you trade mainly with other VAT registered businesses. Consider a milk round or someone trading in fish, both of which are zero rated in their current form. You would be adding VAT of zero to your sales, so nothing, but would be able to reclaim the VAT you are charged by suppliers – on items such as petrol/diesel, accountants fees, etc., so will have a VAT reclaim every quarter.

A plumber or electrician mainly doing domestic work on the other hand, would be in the opposite position. If already charging what they believe to be the maximum market rate at least some of the VAT charged out would have to be absorbed into existing prices, leaving you potentially less profitable when newly VAT registered. There are schemes that may help a little, and growing way beyond the VAT threshold would be a great strategy to restore profitability.

How can a good accountant help me with VAT registration?

A good accountant will be proactive and advise you of the implications of VAT registration before it happens. A good accountant would also be able to do some calculations to let you know the impact of VAT registration on profit. A good accountant can also register you for VAT but remember that it is your responsibility to monitor your turnover for VAT purposes in the first place. A good bookkeeper or accountant will also be able to keep the VAT element of your books orderly and submit your quarterly VAT returns.

About the author

Dr Roger Clough, founder

Roger has a PhD in UK food retail change, has lectured extensively in business finance and accounting, and has run several businesses over three decades. As an AAT Licensed Accountant he likes to be on a journey with clients rather than the kind of accountant who just prepares the statutory accounts after the year end – meaning that advice can be given and decisions can be made before it is too late.

About Clough Accounting

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Roger Clough t/a Clough Accounting is an AAT Licensed Accountant

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