VAT (Value Added Tax) is a tax that many businesses have to pay in the UK. However, you only have to pay it if you earn above a certain amount. This blog covers everything you need to know about the VAT threshold so you will know when you should be paying the tax or not.
Overview of VAT
VAT is a consumption tax, and it is added onto the price of certain goods and services when they are sold.
The seller is responsible for adding the tax onto the price, and customers then pay this when they buy the product or service in question, after which the tax is paid to HMRC.
Some goods and services are exempt from VAT (e.g. food and health services). Other services are not exempt, but they have a lower rate of VAT, which is called the Reduced Rate. This is 5% compared to the Standard Rate of 20%.
What Is the VAT Threshold?
If you sell products or services that are not exempt from VAT, you may have to charge VAT on them. However, this depends on how much you actually earn from selling them.
For example, let’s say you are self-employed and you sell web design services. If you earn below a certain amount - called the VAT threshold - you will not need to charge VAT to your customers.
So, what is the VAT threshold?
The threshold is currently set at £85,000 over 12 months. Note that this is not for the tax year or the calendar year but for any 12-month period.
So if you earn more than £85,000 from September to September, you will earn over the threshold, and you will have to sign up to pay VAT.
You can find out more about the threshold at this page at Gov.uk.
Registering for VAT
If you go over this threshold, you will need to register for VAT and then start charging your customers. You must register if you go over the threshold OR if you know that you are going to go over it in the next 30 days.
But what exactly does this earnings threshold cover? That’s where VAT taxable turnover comes in.
VAT Taxable Turnover
VAT Taxable Turnover is essentially everything that you sell that is not VAT-exempt. So, if you sell food and drink products, these would not count towards your VAT Taxable Turnover.
But if you sell other items that are not VAT-exempt, these would count towards it.
You will need to work out the total turnover for all of the things you sell that are not VAT-exempt over each 12-month period. If this comes to over £85,000, you’ll need to sign up to pay VAT.
In general, you will have to sign up for VAT when you earn over the threshold. There are, however, exceptions to the rule, and one of the most common situations is where your VAT taxable turnover goes over the threshold temporarily.
If this happens, you can contact HMRC and provide evidence that shows that your turnover will not go over the threshold in the coming 12 months. It is then up to HMRC to decide on whether you need to register.
This can be a complex area, and you might want to get specialist VAT advice for small businesses if you think it might affect you.
How We Can Help with Your VAT
VAT can be complex, and there are areas that are not always clear. You may need advice or guidance, or you might simply want some help contacting HMRC.
We provide tax advice for small businesses in Hampshire and Surrey, including help with all aspects of VAT.
For example, one of the biggest problems is when businesses are paying too much - or underpaying - and we can help to sort this out. Legislation also changes regularly, which can lead to you making an honest - but costly - mistake. With an expert on board, you won’t have to worry. And we can also save you time registering, completing returns and other tasks.
Even if you already pay VAT, we can help. We might spot problems when you come to us, and we can help to get them sorted out sooner. So if you would like help with any aspect of VAT, we would love to hear from you.