Tax & admin · 11 February 2021

What is the VAT threshold for small businesses?

What is the VAT threshold for small businesses?

Understanding and managing Value Added Tax (VAT) form part of the fundamentals of business, whether you plan to be a Mom ‘n Pop or a Microsoft competitor. Most importantly, on your path to arm wrestling with Microsoft, you need to know what the current VAT threshold is and when, in advance, do you need to register for VAT.

Take the time to sit with a professional and gain a strong understanding of the benefits you might obtain from a VAT registration, regardless of your proximity to the threshold.

The current UK threshold is £85,000 for the tax year 2020/2021. An annual turnover exceeding that requires VAT registration for the business. You have 30 days to do so or face a fine.

If you are starting a business today, don’t expect this threshold to be the same next year. It generally moves year on year. In 2016, the threshold was £83,000 and looking back from that, you will find a threshold of £77,000 in 2012 and, even further back, you will find a threshold of just £64,000 in 2007. Every year, you will have to recheck what the new threshold is and register when you hit it,  or before, if it makes financial sense.

With our semi-cyborg existence, you don’t need to analogue-remember this. Your accounting software has settings that can alert you to an approaching threshold, be that VAT or any other threshold: outstanding debt, liability buffers etc.

Remember that the turnover year and calendar year are not the same. The turnover year starts on the first day of trading, i.e. a rolling 12-month basis from any given point.

When do you need to register for VAT?

As mentioned above, as the VAT threshold is currently GBP85,000, it is compulsory for you to register if your turnover exceeds that threshold. However, your accountant or financial advisor might propose that you do a voluntary registration of your business.

Registering for VAT certainly sends a message to the market that you are serious about growth as a business. It does give your brand gravitas. It also allows you to claim back VAT from your purchases, and it will suit any corporate or B2B project clients you have.

What are the benefits from registering for VAT?

The primary benefit of registering when over the VAT threshold is that you avoid being heavily penalised and remain legally compliant. VAT benefits are not solely for the enjoyment of large businesses. Review these pros and cons and consider these in relation to your business’ current and future context:

Pros:

  • The VAT incurred from purchasing goods and services can be reclaimed.
  • Input tax (the VAT incurred from purchasing) could total up to more than the Output tax (VAT you invoice out to your clients). If Input tax is greater than the output tax, you will be reimbursed the difference, which is a saving.
  • You avoid missing the threshold and penalties, and people generally take a business more seriously when VAT registered. Not being registered states that your business has a small turnover, and large client projects might not be awarded to you as they feel you are not big enough to handle it.
  • Your unregistered status is a loss of vat for corporate clients.
Cons:

  • You will probably pay more tax than necessary if your Output tax (vat from invoicing clients) is more than your Input tax (vat from purchased items).
  • More administration is required on paperwork. You will need to file a return to the tax department, which you might have to do personally if you do not have a bookkeeper or accountant managing your books. Good accounting software will certainly help.
  • Adding VAT to invoices does push up prices to customers, especially if your target market is Mr Public.
Seek professional accounting assistance and review your historical records before registering for VAT if you are in the least bit unsure.

Brexit and VAT

There is a transition period for VAT processes as Brexit is rolled out. Up until 1 January 2021, UK VAT had to be charged to destination clients. If the goods’ value reached the distance selling threshold, you had to register for VAT in that destination country.

Each EU country has its own selling threshold, but they generally hover around €35,000.

The new change coming in will take effect from 1 July 2021.  The transition is as follows:

To prevent multiple EU VAT registrations, UK businesses will not benefit from the distance selling thresholds from 1 January 2021.  What must UK businesses do in the first “half” of 2021 (1 January 2021 – 1 July 2021) and then after 1 July 2021?

First half of 2021

Treat the EU customer sales as a zero-rated export for UK VAT purposes, and the goods will be subject to import VAT on arrival into the EU. The EU customer would pay this import VAT which might not be commercially attractive.

Or:

Act as the importer of the goods in each EU country and register for VAT in that country. You pay the import VAT (recovering it in each EU country) with the place of supply being the EU country destination. UK businesses will also need to charge the specific EU countries VAT at that destination.

Or:

Hold stock and despatch orders from that stock in one EU country. You would then register for VAT in that country. Import VAT can be paid and recovered by the UK business.

Being registered for VAT in that EU country means the onward supply within the EU will be intra-EU supplies subject to the distance-selling thresholds.

Or:

Appoint a freight agent for the import responsibility of the products. The freight agent would charge you or the UK businesses for the Import VAT, which is irrecoverable.

After 1 July 2021 – e-commerce businesses

The EU is replacing distance-selling thresholds with One Stop Shop (OSS). E-commerce businesses will not have to register for VAT in each EU country but will need to charge the relevant country-specific VAT rate. This would then be declared via the OSS VAT return.

UK businesses can use the OSS via registering as a ‘Non-Union’ taxpayer in one EU member state. Regular domestic returns and quarterly returns must be submitted in that member state.

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