Going over the VAT threshold – what you need to know

For smaller businesses in Leeds and Rochdale, crossing the Value Added Tax (VAT) threshold is a significant milestone. Whether you're a small startup, a growing enterprise, or an established company, surpassing this threshold comes with responsibilities and opportunities. This article will guide you through going over the VAT threshold in the UK and how to navigate this important financial checkpoint.

Understanding the UK VAT threshold

In the UK, VAT is a consumption tax levied on the value added to goods and services at each stage of production or distribution. Businesses must register for VAT with HMRC if their taxable turnover exceeds £85,000 in a 12 month rolling period, NOT by the end of their financial year.

Implications of going over the VAT threshold

Mandatory VAT registration

Once your taxable turnover exceeds the VAT threshold, legally, you must register for VAT. Registration can be done online through the HMRC website.

Charging VAT to customers

After registration, you must start charging VAT on your products or services. This involves increasing your prices to include the applicable VAT rate. The current standard rate is 20%, but some goods and services may have reduced or zero rates.

Input and output VAT

As a registered business, you must account for input VAT (VAT paid on your purchases) and output VAT (VAT collected from your customers). The difference is either paid to or refunded by HMRC.

Submitting VAT returns

You must submit VAT returns to HMRC and pay any VAT due typically every quarter, although some businesses do file their VAT returns monthly. This involves reporting the VAT you've collected and paid, allowing HMRC to calculate your liability or refund. It is now mandatory for all VAT registered businesses, whether they have reached the VAT threshold or not, to file their VAT returns in accordance with HMRC's Making Tax Digital for VAT scheme, which we discuss later in this article.

Complex bookkeeping

Managing VAT requires meticulous bookkeeping and record-keeping. You must ensure that your invoices and receipts correctly show the VAT charged or paid and these records should always be up to date at the point at which you file your VAT return.

Benefits of VAT Registration

While going over the VAT threshold brings additional administrative work, it also offers some benefits. These include:

Credibility

Being VAT registered can enhance your business's credibility in the eyes of other businesses and customers. However, your business doesn't have to earn more than £85,000 to become VAT registered. You can register for VAT regardless of the amount of your turnover, but you must abide by the VAT regulations.

Reclaiming input VAT

You can reclaim VAT paid on business related expenses, which can help reduce your overall tax liability and can help with your cash flow.

Potential for growth

Reaching the VAT threshold often signifies that your business is growing, which can be an exciting opportunity to expand.

The downsides of going over the VAT threshold

Going over the VAT threshold can have some downsides for businesses including:

Increased admin

When your business exceeds the VAT threshold, you must register for VAT, maintain proper records, and submit VAT returns regularly. This administrative work can be time-consuming and may require additional staff or resources.

Higher prices for customers

You'll have to charge VAT on your products or services, thereby increasing customer prices. This can make your offering less competitive in the market.

Cash flow constraints

You will have to pay your VAT to HMRC regularly, even before you've received payment from your customers. This can strain your cash flow, especially if you have slow-paying clients.

Complexity of international transactions

If your business engages in international trade, dealing with VAT for cross-border transactions can be even more complicated, as you may need to navigate various VAT rules and regulations in different countries.

Compliance risks

Failing to comply with VAT regulations can result in penalties and fines from HMRC. The tax authority may also conduct VAT investigations into your business dealings, which can be disruptive and costly.

Making Tax Digital for VAT

VAT regulation has been transformed recently with the introduction of Making Tax Digital (MTD) for VAT. Since 2022, it has become mandatory for all VAT registered businesses to submit their VAT returns digitally to HMRC, whether their turnover is above the VAT threshold or not. Businesses can no longer submit paper-based returns or copy and paste their VAT data into an online form. To comply, VAT registered businesses must use MTD compatible software, which links directly to HMRC's MTD for VAT portal from their accounting software or financial spreadsheets.

Conclusion

Crossing the VAT threshold in the UK is a significant step for your business. While it does bring increased administrative responsibilities and a requirement to comply with the MTD for VAT regulations, it also offers opportunities for growth and financial benefits. Understanding the implications and seeking professional advice is crucial to navigate this transition successfully.

Navigating the VAT transition

If you think your business will likely exceed the VAT threshold in the coming months, we would be happy to advise you on what steps you need to take. In addition to explaining what is required and providing help and support to get you up and running on the relevant MTD for VAT software, we can also take care of your bookkeeping and accounting processes, thereby ensuring everything is logged correctly and freeing up your time to run your business.

To arrange a free consultation to discuss VAT and your business, please call 0113 320 0001 or email office@dwco.co.uk.