The VAT threshold is the annual turnover at which companies must register for value added tax (VAT).
The current VAT registration threshold in the UK is £85,000. The government has announced that this threshold, which has been in force since 2017, will remain unchanged until 31 March 2024.
The VAT thresholds for previous years are as follows:
- 2014-2015: 81 000 GBP
- 2015-2016: 82 000 GBP
- 2016-2018: 83 000 GBP
- 2019-2024 - PLN 85.000
Once your business reaches the VAT threshold, you have 30 days to register for VAT with HMRC. Once this process is complete, your company will have additional responsibilities, including:
- Collect VAT on your products or services
- Pay VAT on goods or services supplied by your suppliers
- Submit a VAT return to HMRC annually
- Maintaining VAT accounting and administration
VAT registration
Registration for VAT is a legal requirement for businesses above this threshold and this threshold is regularly reviewed by HMRC.
You must register for VAT if your small business has earned more than the VAT threshold in a 12-month period or if you expect your VAT sales to exceed the VAT registration threshold in the next 30 days.
The relevant 12-month period does not necessarily coincide with the tax year. Regularly check whether your VAT turnover in a given 12-month period has exceeded the current VAT registration threshold.
Professional advice: Even if you've just crossed the £85,000 VAT registration threshold, you must register within 30 days of the end of the month in which you crossed the border. It's important to keep a close eye on your billing at least once a month, especially as you approach the threshold.
Does the VAT threshold apply to invoicing or profit?
The VAT threshold is measured on the invoice. Your turnover is the total value of everything you sell that is not exempt from VAT.
Goods and services exempt from VAT include:
- education and training
- Healthcare and treatment
- Funeral plans, funeral or cremation services
- Antique
Zero-rated goods and services include:
- Incontinence products, maternity pads, sanitary protection
- Books, magazines and newspapers
- The baby clothes
- Children's clothing and footwear
- bicycle helmets
Different VAT rates
| Name | current rate | Description and examples |
| Standard | 20% | The standard VAT rate is the standard rate - this is the rate charged on most goods and services in the UK, unless specifically stated as reduced or zero. |
| Reduced | 5% | Household fuel and electricity, energy efficient insulation, child car seat, etc. |
| Nul | 0% | Food (not eaten in restaurants or takeaways), books/newspapers, children's clothes/shoes |
| issued | not applicable | Goods and services exempt from VAT, such as antiques, care and funeral services, may not be charged VAT. |
| Out of range | not applicable | Items that are completely outside the UK VAT system will include an ITV certificate |
How the VAT threshold is calculated
You calculate your taxable annual turnover by adding up the total turnover (excluding VAT) of your products and services during the last tax year (April to March).
For example, if you sold $60,000 worth of goods and $30,000 worth of services in 12 months, your total VAT revenue is $90,000.
As you have exceeded the £85,000 VAT threshold, you will need to register for VAT from that point onwards and start charging VAT on the relevant goods and services you sell.
Private entrepreneurs and VAT–Whether you exceed the VAT threshold or voluntarily register for VAT, we explain everything you need to know about VAT
What if it's just a problem?
Your company may exceed the VAT threshold, but only temporarily. Therefore, it is possible to apply for a "registration exception" for your small business, which means that you do not have to register for VAT.
You must apply for this exception to VAT registration; it's not enough to say nothing and argue later.
Write to HMRC and explain the circumstances of why you are requesting permission to refuse registration. Reasons for not registering for VAT even though you have exceeded the VAT threshold include:
- Exceeding the VAT threshold was a unique event
- That it is unlikely that the VAT threshold will be exceeded again in the near future
You must also provide supporting documents to support your case.
Professional advice:Even if HMRC accepts your application for VAT exemption, please note that this is a one-time exemption and not a continuous exemption. Even if your turnover exceeds the VAT threshold again, you still have to register for VAT.
Register voluntarily for VAT purposes
You can still voluntarily register for VAT even if your taxable turnover is below the VAT registration threshold of £85,000.
The advantage of this is that it becomes cheaper if your customers are also subject to VAT. They can reclaim VAT on anything they buy from you, a 20 percent savings compared to not registering for VAT.
It is estimated that about 20 percent of all VAT registered businesses operate below the VAT registration threshold.
If you're just starting out and know you'll soon reach the £85,000 VAT threshold, or if you mainly sell to VAT registered businesses, you can reclaim VAT on your installation costs. – short-term savings.
Do subsidies count towards the VAT threshold?
Financing through subsidies usually falls outside the scope of VAT.
How do I pay VAT to HMRC?
Sure, you can keep your nose shut and donate 20 percent of your sales to the tax collector, but there are legal, official ways to lower sales tax and make smooth payments to improve your cash flow:
- Fixed-rate plan- If your annual turnover is less than £150,000, you can join this scheme to pay VAT to HMRC at a fixed percentage of your turnover, depending on your industry. VAT rates in the flat-rate system range from 4% to 14.5%, while the standard rate is 20%. If you're part of a Flat Rate Plan, you'll have to leave when your turnover exceeds the £230,000 mandatory cancellation threshold.
- VAT cash accounting scheme“It works in a similar way to regular cash accounting, where VAT is paid and recorded when the money changes hands, not when the invoice is received. To participate in the VAT cash system, you must have a VAT turnover of £1.35 million or less. There is a mandatory deregistration threshold and you must leave the scheme if your taxable turnover exceeds £1.6m.
- Annual VAT settlement system– In the context of annual VAT accounting, companies submit one VAT return each year and pay advances on the VAT invoice. You can join the scheme if your VAT turnover is £1.35 million or less. Businesses participating in the annual accounting VAT scheme must leave when their turnover exceeds the £1.6 million de-registration threshold.
How not to exceed the VAT threshold
Especially if you're a salesperson, having to charge your customers an extra 20 percent isn't very pleasant - it puts you at a disadvantage compared to your rivals.
One way to stay below the threshold is to split the company into two or more separate companies depending onproven trade, but each part of your business should offer different services to make the distinction clear. It is also useful to have a separate bank account for each company.
The self-employed are increasingly avoiding VAT–Tens of thousands of small businesses are deliberately staying small to avoid being charged VAT, meaning they'll have to raise their prices if they cross the £85,000 threshold.
More about VAT
Goods with import duties and zero VAT–If I want to import zero VAT goods, do I have to pay import tax on them? Where can I find more information about this?
FAQs
What is the VAT threshold? - Small businesses in the UK? ›
The VAT threshold is the VAT taxable turnover figure mentioned earlier. If your turnover goes over £85,000, or you know it will, you must register for VAT. Some businesses will also need to register when selling particular goods or services, and in certain locations or markets, for example Northern Ireland and the EU.
What is the VAT threshold limit UK? ›VAT (Value Added Tax) is a tax added to most products and services sold by VAT -registered businesses. Businesses have to register for VAT if their VAT taxable turnover is more than £85,000. They can also choose to register if their turnover is less than £85,000.
How much is the VAT threshold in the UK? ›How much is the UK VAT threshold? In the UK, the VAT registration threshold is currently £85,000 (2021), and the most recent UK VAT thresholds are: 2014-2015: £81,000. 2015-2016: £82,000.
What is the VAT threshold? ›The VAT threshold is the volume of annual turnover at which businesses are required to register for value-added tax (VAT). Registering for VAT is a legal requirement for businesses that exceed this threshold, and the threshold is reviewed regularly by HMRC.
How do I avoid VAT threshold? ›There are a few ways to stay under the VAT threshold, one of which involves splitting your business to avoid VAT. You can break your company down into two or more separate businesses, but each part of your company needs to offer different services to make the distinction clear.
What is the VAT threshold UK 2023? ›If at the start of any 30-day period you believe that your VAT taxable turnover for that 30-day period alone will exceed the VAT registration threshold (£85,000 for 2023/24), you need to register immediately.
What happens if I go over the VAT threshold? ›If you temporarily go over the VAT threshold, you will need to register with HMRC specifically for VAT and tell them the date when you went above the limit and the amount. You will then need to submit a backdated VAT return and pay the amount owed.
How does VAT work for small businesses? ›It applies to more or less all goods and services that are bought and sold. When a small business or self-employed person is VAT-registered, they can charge VAT on the goods and services they sell and claim back the VAT charged on goods and services they buy for their business.
What are the basic VAT rules in the UK? ›Most goods and services are charged at the standard rate of 20%. You should charge this rate unless the goods or services are classed as reduced or zero-rated. Get a list of reduced or zero-rated goods and services.
Do overseas sales count towards VAT threshold? ›Hi, If your services are deemed as outside the scope of VAT, this will not count to your VAT turnover. Thank you.
Who is exempt from VAT? ›
Certain goods and services are exempt from VAT. This means that they are not subject to VAT, and therefore do not incur the standard 20% VAT charge. Examples of exempt goods and services include insurance, education, and health services.
How is VAT calculated UK? ›You must add 20% to the price you charge for the goods or service. You can do this by multiplying the price you charge by 1.2. For example, if your business sells sports equipment for £50, you multiply £50 by 1.2 for a total VAT inclusive price of £60.
What is VAT calculation rules? ›How do you take VAT off a price? To exclude VAT use the following: to estimate VAT gross amount, divide the gross amount by 1+ VAT percentage, then deduct the gross amount, multiply by -1, and round it off to the closest value.
Can you opt out of VAT? ›How to cancel. Cancel your VAT registration online. If you cannot use the online service, fill in and send form VAT7 to cancel your VAT registration by post.
How can I reduce my VAT liability? ›Running a business means incurring a variety of expenses, such as travel costs, insurance, telephone bills and internet fees. You can offset these expenses against company profits and effectively reduce your VAT bill. A good example is the home phone line of the businessperson or director of the company.
Does VAT threshold reset? ›For the 2023/24 tax year, the VAT registration threshold is set at £85,000. This threshold can change each year, although it has now remained the same for several years. It's calculated on a rolling basis, so you'll need to monitor your taxable turnover for a rolling 12 month period.
What is the business tax rate for 2023 UK? ›Following last year's political upheaval, the original plans to increase corporation tax rates in the UK will proceed from 1 April 2023, with a basic rate of 25 per cent rather than the current 19 per cent.
What is business tax UK 2023? ›From April 2023: The main rate of Corporation Tax will be 25% for Companies with profits of £250,000 or more – this applies to all profits. A Small Profits Rate of 19% will exist for Companies with profits of £50,000 or less. The main rate will taper in between £50,000 and £250,000.
Who needs to pay VAT? ›Once registered, a business will need to include the relevant rate of VAT on all their taxable sales. This is output tax. VAT is ultimately paid by their customers, but it is the business' responsibility to pay this to HMRC. Businesses can usually reclaim VAT paid on business related purchases, known as input tax.
How do you calculate VAT threshold turnover? ›The turnover of a business should be easy to determine with accurate records: find the total sales amount for a given period. To determine the VAT taxable turnover, you would then need to subtract any amounts that can be excluded (aren't subject to VAT).
Can VAT tax be refunded? ›
Typically, you have to pay the value-added tax at the time of purchase, and then apply for a refund from the shop. Usually, your purchase must be over a certain amount in order to qualify for a VAT refund.
What is the turnover limit for VAT return? ›However all persons conducting a business must register for VAT from the date they commence business if they believe their taxable turnover will exceed a threshold of Rs. 40 lakhs in 12 consecutive calendar months.
What is the best VAT scheme for a small business? ›- VAT Annual Accounting Scheme. VAT-registered businesses usually hand in their HMRC VAT returns and payments 4 times a year. ...
- VAT Cash Accounting Scheme. ...
- VAT Margin Scheme. ...
- Capital Goods Scheme. ...
- VAT Retail Schemes.
The standard rate of VAT is 20 per cent, though there are other rates on some products and services. VAT (Value added tax) is a tax on most goods and services, levied at the point of sale.
Can you set up 2 businesses to avoid VAT? ›Disaggregation is when business owners seek to avoid charging VAT by splitting their business into different parts to ensure each operates under the VAT registration threshold. For a limited company, some business owners may look to establish separate companies. A sole trader may seek to establish separate trades.
What is VAT in UK for US citizens? ›Importing goods from the US to the UK
If you're importing goods from the USA, there's no requirement for VAT-registered businesses to account for VAT. If you're importing something from the US, the US sales tax will not be added, but rather, the UK tax rate (usually 20%) will be paid upon import.
Types of indirect taxes (VAT/GST and other indirect taxes).
The United States (US) does not have a national sales-tax system. Rather, indirect taxes are imposed on a sub-national level. Each state has the authority to impose its own sales and use tax, subject to US constitutional restrictions.
| Country | Standard VAT/GST Rate | Reduced Rates |
|---|---|---|
| USA | There is no VAT in the USA. | |
| Uzbekistan | The standard VAT rate is 15% | |
| Vanuatu | The standard VAT rate is 15% | |
| Venezuela | The standard VAT rate is 16% | 8% |
- insurance, finance and credit.
- education and training.
- fundraising events by charities.
- subscriptions to membership organisations.
- selling, leasing and letting of commercial land and buildings — this exemption can be waived.
You will need to request their VAT registration number and display this on your invoices. It will also need to be reported to HMRC within your VAT return and a separate EC sales list. If your place of supply is in a country other than the EU then you do not need to charge VAT as it is outside the scope of VAT entirely.
Is VAT on turnover or profit? ›
The VAT threshold is based on your sales aa a business,not on your profits.
What are 3 items that are VAT exempt? ›- Education and training.
- Insurance, finance and credit.
- Fundraising events by charities.
- Medical treatments provided by hospitals.
- Subscriptions to membership organisations.
- Selling, leasing and letting of commercial land and buildings — though authorities can waive this exemption.
But you can get a refund from the retailer if when you bought the goods you got a VAT 407(NI) form. You may be able to get a VAT refund if you're only traveling to Great Britain in order to change planes. You must be travelling to a non EU country and the goods must be in your hold luggage at all times.
What items are zero rated VAT? ›Examples of items that may be zero-rated include certain foods and beverages, exported goods, donated goods sold by charity shops, equipment for the disabled, prescription medications, water, and sewage services, books and other printed publications, and children's clothing.
Who pays for VAT UK? ›VAT is paid by consumers on purchases they make from VAT-registered businesses. As such, it's an end-user tax applied at the point of consumption. When it comes to handing VAT to the government, that's the responsibility of VAT-registered individuals and businesses.
What is the easiest way to calculate VAT? ›To work out the total price at the standard rate of VAT (20%), multiply the original price by 1.2. To calculate the reduced VAT rate (5%), multiply the original price by 1.05.
Is VAT still 20% in the UK? ›Different VAT rates apply to different goods and services. The standard VAT rate is 20%. It applies to most goods and services. The reduced VAT rate is 5% — this applies to goods and services like some health products, fuel, heating and car seats for children.
What are the 3 types of VAT? ›- standard rate.
- reduced rate.
- second reduced rate.
- zero rate.
- livestock rate.
In discussing VATs, there are three different methods of calculating the tax liability -- the invoice method, the addition method and the subtraction method -- any one of which can be used to achieve the same result.
What is an example of a VAT calculation? ›VAT is commonly expressed as a percentage of the total cost. For example, if a product costs $100 and there is a 15% VAT, the consumer pays $115 to the merchant. The merchant keeps $100 and remits $15 to the government.
How can I avoid VAT in UK? ›
Goods and services that are 'out of scope'
Some goods and services are outside the VAT tax system ('out of scope') so you cannot charge or reclaim the VAT on them. For example: goods or services you buy and use outside of the UK. statutory fees, like the London congestion charge.
When do I need to make a clawback adjustment? Clawback applies where VAT is deemed to have been over recovered and HMRC is therefore entitled to 'claw back' all or part of the VAT initially recovered.
How do I clear my VAT? ›Create a journal to clear the VAT
Create a journal to transfer the amount from the VAT Liability ledger account to the VAT on Sales or VAT on Purchases ledger accounts. Enter the opposite debits ad credits to the amounts on the nominal activity report.
You can choose to register for VAT if your turnover is less than £85,000 ('voluntary registration'). You must pay HM Revenue and Customs ( HMRC ) any VAT you owe from the date they register you. If everything you sell is exempt from VAT, you do not have to register for VAT.
What happens in a VAT inspection? ›During the visit. HMRC will work with you to put right any problems with your VAT . They'll also tell you about any additional tax and penalty you have to pay. Helping them with the check will reduce the amount of any penalty.
How is VAT treated in financial statements? ›In general, however, VAT is considered to be a type of indirect tax which would fall under the category of "other expenses" on a business's income statement. This is because VAT is levied on the sale of goods and services, rather than on the income of the business itself.
How can I avoid VAT threshold? ›You can stay under the VAT threshold by splitting your business, working fewer days, or not taking big one-off payments. If you go temporarily over the VAT threshold you may be able to apply for an exception.
What is the threshold for paying VAT in the UK? ›VAT (Value Added Tax) is a tax added to most products and services sold by VAT -registered businesses. Businesses have to register for VAT if their VAT taxable turnover is more than £85,000. They can also choose to register if their turnover is less than £85,000.
What is the 135 VAT threshold UK? ›Postponed VAT Accounting (PVA)
Effective January 1, 2021, Postponed VAT Accounting is available for UK imports valued at over 135 GBP. This means that UK VAT-registered businesses are able to declare and recover import VAT on the same return instead of paying it each time and then later recovering it.
VAT rates for goods and services
The standard rate of VAT increased to 20% on 4 January 2011 (from 17.5%). Some things are exempt from VAT , such as postage stamps, financial and property transactions. The VAT rate businesses charge depends on their goods and services.
What is the de minimis rule for VAT UK? ›
The main test- the input tax is de minimis if exempt input tax is not more than £625 per month on average, and not more than half of the total input tax. The test(s) should be applied to each VAT accounting period.
Do I have to pay 20% VAT? ›Most goods and services are charged at the standard rate of 20%. You should charge this rate unless the goods or services are classed as reduced or zero-rated. Get a list of reduced or zero-rated goods and services.
Can a US company charge UK VAT? ›There is no UK VAT registration threshold for overseas businesses trading in the UK. As a result, even one sale of a modest value can trigger an obligation to register for VAT in the UK in order to account for any VAT charged or incurred.
What customers are exempt from VAT? ›Products that shouldn't be taxed are considered to be exempt from VAT. Businesses, charities, and other types of organisations can also be considered to be exempt from VAT. A business is VAT-exempt if they only sell VAT-exempt products, or if they're not involved with taxable 'business activities'.
Do zero rated sales count towards VAT threshold? ›Zero-rated means that the goods are still VAT-taxable but you don't charge your customers any VAT. You still have to record these sales in your VAT accounts and report them on your VAT Return, which means you can reclaim VAT on your expenses. VAT exempt items are outside of all VAT schemes and are not taxable.
Can I reclaim VAT on overseas expenses? ›International VAT refunds are available from overseas tax authorities on Travel & Entertainment (T&E) expenses incurred by employees on foreign business travel. Eligible expenses include accommodation, meals, taxis, car hire, public transport and conference costs.