18 April 2023

What happens if I go over the VAT threshold?

Value Added Tax (VAT) is a tax levied on the value added to goods and services during the production and distribution process. In the UK, the current VAT threshold is £85,000, and the current standard rate of VAT is 20%. In this article, we look at what happens if businesses, located in say Bromsgrove or Redditch, go over the VAT threshold.

Registering for VAT

Businesses with an annual turnover of £85,000 or more must register for VAT with HM Revenue and Customs (HMRC). This registration must happen within 30 days of reaching the threshold. Failure to do so can result in penalties and fines.

However, a business may breach the £85,000 VAT threshold during a rolling 12 month period and not just based on the final turnover achieved in the annual accounting period.

Once registered for VAT, you must charge VAT on all taxable goods and services you supply to your customers. You can also reclaim VAT on any goods or services you purchase for your business, such as office equipment or stock.

The benefits if you go over the VAT threshold

While it may seem like an administrative nightmare, there are many benefits if you go over the VAT threshold. Here are a few reasons why you might want to aim for that £85,000 mark:

Increased credibility and professionalism

Registering for VAT can boost your business's credibility and professionalism. It shows that you're a serious business making a significant turnover. This can be especially important when dealing with larger clients or bidding for contracts. However, you don’t have to turnover above £85,000 to be VAT registered. You can register whatever your income is, but you will still be bound by all the rules of being VAT registered.

Improved cash flow

Once you're registered for VAT, you can reclaim the VAT you pay on business expenses. This can include everything from office rent to equipment purchases. Reclaiming this VAT will improve your cash flow and have more money to reinvest in your business.

Access to new customers and growing your business

Some businesses, particularly those in the B2B sector, will only work with VAT-registered businesses. By going over the threshold, you can access these customers and potentially win new business.

Opportunity to streamline processes

Registering for VAT will require you to keep detailed records of your sales and purchases. While this can be time-consuming, it can also allow you to streamline your processes and identify areas where you can improve.

Ways to simplify how you can account for VAT

It may be possible for some VAT registered businesses to join one of HMRC’s VAT schemes. These voluntary schemes help businesses calculate and pay VAT to HMRC. In some cases, they can help ease cash flow pressures while enabling the business to keep up with its VAT payments.

The schemes include the cash accounting scheme, whereby you only pay your VAT bill when your customer pays you, not based on the invoice date. The same applies to reclaiming VAT: you can only reclaim it once you have paid your supplier. This VAT scheme can benefit new businesses that need to manage their finances more closely.

Other types of VAT schemes include:

  • Flat rate scheme
  • Retail schemes
  • Margin scheme
  • Annual accounting scheme

Further details on all of these schemes and how they work can be found on the HMRC VAT web pages.

The admin consequences if you go over the VAT threshold

The potential ‘downside’ of becoming VAT registered is the likely increase in administrative tasks.

For example VAT returns must be submitted to HMRC every quarter (see the next section about compliance with Making Tax Digital). The returns must detail the amount of VAT charged and paid during the previous quarter. This requires careful record keeping and accurate accounting, as mistakes or discrepancies can lead to penalties and fines.

In addition to the quarterly VAT returns, you must keep records of all VAT invoices and receipts for at least six years. These records may be subject to inspection by HMRC, so it is essential to keep them in a safe and easily accessible place.

Compliance with Making Tax Digital for VAT 

Since April 2022, all VAT registered businesses must comply with HMRC’s Making Tax Digital for VAT (MTD for VAT) scheme. MTD for VAT is part of the Government’s plan to digitise the taxation system in the UK and will apply to income tax and Self Assessment and corporation tax in due course.

Further details about MTD for VAT can be found on our VAT services page.

VAT consequences on prices and cashflow

Another consequence of going over the VAT threshold is the impact on your prices. If you are selling your products or services without VAT, you will need to increase your prices to cover the VAT you will now need to charge. This can make your prices less competitive and may lead to decreased sales.

Alternatively, you may absorb the VAT cost and maintain your current prices. However, this can reduce your profit margins and may not be sustainable in the long term.

Going over the VAT threshold can also impact your cash flow. When you charge VAT on your sales, you must pay this VAT to HMRC, usually within one month of the end of the VAT quarter. This can put a strain on your cash flow, especially if your customers take a long time to pay their invoices.

You may also need to adjust your payment terms to ensure you receive payment before the VAT is due.

Scrutiny from HMRC

Another consequence of going over the VAT threshold is the increased scrutiny from HMRC. Businesses registered for VAT are more likely to be audited by HMRC to ensure that they comply with all the VAT rules and regulations, not just those relating to MTD for VAT. This can be time-consuming and costly, especially if you are found to have made errors in your VAT returns or records.

How can JRMA help?

JRMA can take on board some, if not all, of your VAT processing and compliance work, taking a lot of the administrative burden away from you. We can advise on which VAT scheme is best for your business and ensure all your bookkeeping is done accurately and on time, thereby reducing the likelihood of late filing or payment penalties. We can also advise on which cloud accounting software to use to ensure you are complying with MTD.

Please get in touch to find out more and discuss your current or future VAT requirements.

In summary, going over the VAT threshold can significantly impact your business no matter where you are based in the UK. It can increase your administrative burden, affect your prices and cash flow, and increase scrutiny from HMRC. However, there can also be many benefits, including growing your business. With careful planning and preparation, mitigating these consequences and ensuring that your business remains compliant with VAT rules and regulations is possible.