I Didn’t Realise I Went Over the VAT Threshold: A Guide for UK Small Businesses, Self-Employed and Sole Traders
VAT or Value Added Tax is a tax on the value added to goods and services, usually paid by the end consumer. It is a consumption tax that is charged at each stage of the supply chain, and businesses that are registered for VAT are responsible for collecting and paying this tax to HMRC.
If your business is VAT registered, you will need to charge VAT on your sales, and you will be able to claim back any VAT you have paid on your business expenses. VAT returns must be submitted to HMRC at regular intervals, usually every three months, detailing the amount of VAT you have charged and the amount you have paid.
The VAT Threshold
The VAT threshold is the level of turnover above which a business must register for VAT. The current VAT threshold in the UK is £85,000 per year. If your business’s taxable turnover exceeds this threshold over a 12-month period, you must register for VAT with HMRC.
However, if your business’s taxable turnover is below the threshold, you can choose to register voluntarily for VAT, which may be beneficial if you sell to VAT-registered customers who can reclaim the VAT you charge.
What to do if You Exceed the VAT Threshold
If you exceed the VAT threshold, you must register for VAT with HMRC within 30 days of the end of the month in which you exceeded the threshold. For example, if your turnover exceeded the threshold in June, you must register for VAT by the end of July.
Once you have registered for VAT, you will need to charge VAT on your sales and submit VAT returns to HMRC. You will also be able to reclaim any VAT you have paid on your business expenses, which can help to reduce your overall tax liability.
It’s important to note that if you have exceeded the VAT threshold by a small amount, you may be able to apply for an exception and avoid registering for VAT. This is known as the “exceptional circumstances” rule, and it applies if you can show that your taxable turnover is not expected to exceed the VAT threshold in the next 12 months.
However, if you do register for VAT, you will need to charge VAT on all your sales, even if they are made to non-VAT registered customers. This can potentially make your products or services more expensive, and could reduce your sales and profit margins.
Submitting VAT Returns
Once you are registered for VAT, you will need to submit VAT returns to HMRC on a regular basis. VAT returns detail the amount of VAT you have charged and the amount you have paid, and they must be submitted online using HMRC’s VAT online service.
VAT returns are usually submitted every three months, although you may be able to apply for an annual VAT accounting scheme if your business’s turnover is below £1.35 million. The VAT accounting scheme allows you to submit one VAT return a year and pay your VAT in instalments throughout the year, which can help with cash flow.
Penalties and Interest Charges
Failing to register for VAT or submitting late VAT returns can result in penalties and interest charges from HMRC. The penalty for late registration is based on a percentage of the VAT owed, and it increases the longer you delay. Penalties for late VAT returns can also be significant, and can add up to thousands of pounds.
It’s therefore important to ensure that you register for VAT on time, and that you submit your VAT returns accurately and on time. This can be a complex and time-consuming process, so it’s often worth seeking professional advice from an accountant or tax advisor.
Exceeding the VAT threshold can be a challenging experience for UK small businesses, self-employed and sole traders, but it’s important to take action promptly to ensure that you remain compliant with HMRC regulations and avoid penalties and interest charges.
If you find yourself in this situation, the first step is to register for VAT with HMRC within 30 days of exceeding the threshold. You can do this online, by phone, or by post, but it’s important to make sure that you submit your registration on time.
Once you have registered for VAT, you will need to start charging VAT on your sales and submitting VAT returns to HMRC. You will also be able to reclaim any VAT you have paid on your business expenses, which can help to reduce your overall tax liability.
To stay on top of your VAT obligations, it’s important to keep accurate records of your sales and expenses, and to ensure that you submit your VAT returns accurately and on time. You can use accounting software to help with this, or you can work with an accountant or bookkeeper to make sure that your records are up-to-date and accurate.
It’s also worth noting that there are a number of VAT schemes available that can help to simplify the VAT process and reduce the administrative burden for small businesses. These include the Flat Rate Scheme, the Annual Accounting Scheme, and the Cash Accounting Scheme. You can find out more about these schemes on the HMRC website or by speaking to an accountant or tax advisor.
In summary, if you didn’t realize you went over the VAT threshold, don’t panic. Register for VAT with HMRC as soon as possible, keep accurate records, and ensure that you submit your VAT returns accurately and on time. By doing this, you can ensure that your business stays compliant with HMRC regulations and avoid penalties and interest charges.
- HM Revenue and Customs. “VAT Registration.” Accessed March 30, 2023. https://www.gov.uk/vat-registration
- HM Revenue and Customs. “VAT: What to Do If You Go over the Threshold.” Accessed March 30, 2023. https://www.gov.uk/vat-registration/what-to-do-if-you-go-over-the-vat-threshold
- “VAT Registration Thresholds.” Simply Business. Accessed March 30, 2023. https://www.simplybusiness.co.uk/knowledge/articles/2018/06/vat-registration-threshold/