Realising you’ve unknowingly crossed the VAT threshold can feel like a ticking time bomb. Many business owners focus on growth and sales but often overlook a crucial financial aspect—Value Added Tax (VAT). The VAT threshold, currently set at £85,000 in the UK, is the point where your business is legally required to register for VAT with HMRC.
This figure isn’t just arbitrary; it marks the income limit beyond which you must charge VAT on your goods and services. Understanding this threshold is vital because failing to register in time can lead to hefty penalties, backdated VAT payments, and potential disruptions to your business.
Knowing where you stand financially is not just a legal requirement but a smart business strategy.
Going over the VAT threshold means your business’s taxable turnover has surpassed the limit set by HMRC, triggering a legal requirement to register for VAT. As of 1 April 2024, this threshold will rise from £85,000 to £90,000 over a rolling 12-month period.
This taxable turnover includes the total value of everything you sell that isn’t exempt from VAT. Crossing this threshold means you must start charging VAT on your goods or services, submit regular VAT returns to HMRC, and ensure proper VAT accounting.
Staying below the threshold allows you to remain VAT-exempt, but once it’s exceeded, registration is mandatory—ignoring this could result in penalties and added financial stress.
If your business exceeds the VAT threshold, you must register for VAT within 30 days of the end of the month when the threshold was breached. The official VAT registration date is the first day of the second month after going over the threshold.
For instance, if you surpass the threshold on 4th May 2024, you must register by the end of June 2024, and your VAT registration will be effective from 1st July 2024. Missing these deadlines can lead to fines and backdated VAT obligations, so timely registration is crucial.
Failing to register for VAT on time can result in penalties calculated based on how late you were in registering and the amount of VAT that should have been paid. HMRC imposes a minimum penalty of £50, but the longer the delay, the steeper the penalty.
In addition to paying the full amount of VAT owed, HMRC will apply a percentage-based penalty depending on how overdue your registration is. Penalties are issued in writing by HMRC, and there are opportunities to appeal if necessary.
Time Beyond Registration Deadline | Penalties |
Nine months or less | 5% of VAT due since registration, plus the full VAT amount owed |
Between nine and 18 months | 10% of VAT due since registration, plus the full VAT amount owed |
More than 18 months | 15% of VAT due since registration, plus the full VAT amount owed |
If you’ve gone over the VAT threshold, it’s essential to take swift action to ensure compliance with HMRC regulations and avoid penalties. The key steps you need to take include registering for VAT promptly and adjusting your business practices to account for VAT going forward. Proper preparation will make managing VAT easier and keep you on the right side of the law.
Here’s what you should do:
Staying under the VAT threshold might seem appealing as it allows you to avoid the complexities of VAT registration and reporting. However, this could also limit your business growth and potentially affect your competitiveness, especially if your competitors are VAT-registered and able to reclaim VAT on their inputs.
While remaining below the threshold avoids additional administrative tasks, you might miss out on opportunities to reclaim VAT on business expenses or make your services more attractive to VAT-registered clients.
For tailored advice on whether staying under the VAT threshold is right for your business, consider consulting with professionals at Excel Accounting and Taxation for comprehensive VAT services in the UK.
If you didn’t realise you went over the VAT threshold, it’s important to act quickly to minimise penalties and get your business back on track. Register for VAT as soon as possible, start charging VAT on your goods or services, and keep thorough records of your transactions.
Understanding your VAT obligations will help you avoid costly mistakes and ensure compliance with HMRC regulations. Addressing the situation promptly will protect your business from financial risks and allow you to focus on growth without the worry of penalties hanging over your head.
Our customer care team at Evirtual Accountants will respond to your queries as soon as possible. We aim to provide you with the best possible service and look forward to hearing from you soon.
