Calculating your business’s VAT can sometimes feel like a bit of a minefield. With changing thresholds, rates and deadlines, there’s a lot to consider.
To make your life that bit simpler, here’s your guide to the VAT threshold 2023.
We’ll also look at the pros and cons of becoming VAT registered as well as how to keep your business under the VAT threshold.
What is VAT?
Before we dive into the VAT threshold 2023, here’s an overview of Value Added Tax (or VAT).
VAT is a tax added to goods or services sold in the UK.
You’ll generally pay VAT when shopping on the high street or paying a plumber (for instance). It’s something that’s charged by businesses and paid by customers. These customers could be individuals, or another company.
Most businesses collect more VAT from their customers than they have to pay other companies. This means you have to fill in a quarterly VAT return and pay any surplus to HMRC.
If your annual business turnover exceeds £85,000, you have to be VAT registered.
You’ll need to complete this registration within 30 days of your turnover exceeding this threshold.
If you don’t register with HMRC, you’ll need to pay anything you owe from the date you should have registered. In some circumstances (depending how much you owe or how late you are), HMRC might charge an additional penalty.
You don’t have to register for VAT if your annual turnover is below £85,000.
Nonetheless, many businesses voluntarily become VAT registered — even if their annual turnover is under £85,000.
How much is VAT in the UK?
There are three different VAT rates. These are the standard rate, the reduced rate and zero rate.
Different services and goods are charged at one of these three rates.
Standard rate of VAT: 20%
This “standard rate” applies to most services and goods in the UK. It means you should charge 20% VAT to your customers, on top of the value of goods or services provided.
As well as goods and services, this includes hiring or loaning goods, selling business assets and items sold to staff (for instance, canteen meals).
Reduced rate of VAT: 5%
Some products are eligible for reduced rates of VAT. This includes things like sanitary products, energy-saving materials and children’s car seats.
Reduced rates also apply depending on the nature of the sale itself. To give just one example, the reduced rate of 5% applies to a mobility device bought by someone over 60, for installation in their home.
This can be a complex area, but an accountant will help categorise your sales if you’re unsure.
Zero-rate of VAT: 0%
Zero-rated goods are VAT-taxable. However, you’d still charge 0% to customers.
In practice, this means you have to record zero-rated sales in your VAT accounts. You’ll also have to report them on your VAT return to HMRC.
Zero-rated goods include things like children’s clothes and shoes, newspapers and books, as well as goods exported to non-EU countries.
VAT exemptions
Some items are completely exempt from VAT. There’s a full list of items (covering both reduced and zero-rated goods) on the gov.uk website, but this includes things like medical services, sports activities and insurance.
While these items don’t have to appear in VAT accounts, you should still record them in your general business accounts.
Do you pay VAT on the first £85,000?
You can opt to register for VAT if your annual business turnover is under £85,000.
This is known as “voluntary registration”. It means you have to pay HMRC any VAT owed from the date you register.
If you’re only registering for VAT after your annual business turnover reaches $85,000 (known as “compulsory registration”), you won’t have to pay VAT on the first £85,000. This is because you’ll only start paying VAT from the date you registered.
To avoid any overdue interest or penalty charges, it’s important to keep strict records of your business turnover. There’s lots of accounting software, for instance QuickBooks, Xero or Sage (as well as traditional accountants) that can help with this.
What did VAT increase to in 2022?
What was the VAT threshold 2022?
VAT wasn’t mentioned in the October 2022 “mini-budget”. This meant VAT rates stayed the same and the VAT registration threshold 2022 remained unchanged (at £85,000).
Over 2022, the standard VAT rate stayed at 20%. The reduced rate of 5% and 0% on zero-rated supplies were also unaffected. The only exception was reduced VAT rates for hospitality and tourism (introduced in October 2021 during the coronavirus pandemic) came to an end on 1 April 2022.
During the 2021 spring budget, Rishi Sunak confirmed these rates and thresholds would stay in place until the end of March 2024.
As a result, the VAT threshold 2023 is still £85,000.
Will the VAT threshold go up in 2024?
In short, we don’t know.
The government hasn’t made any firm commitments on the VAT threshold for 2024 (after 31 March).
There has been some speculation the government might reduce VAT rates at the next election. As this election must happen before 24 January 2025, changes to the VAT threshold during 2024 are possible.
This remains speculation though, and at the time of writing, there are no announcements that the VAT threshold will increase in 2024.
What are the pros and cons of VAT registration?
If your turnover exceeds the VAT threshold of £85,000, what are the advantages and disadvantages of registering for VAT?
In some situations, it’s a good idea to register for VAT, even if you don’t legally have to:
- VAT registration improves perceptions of your business: With extra credibility comes consumer trust and enhanced market appeal. This could give your company a competitive advantage.
- You can reclaim VAT: This means you can reclaim VAT on goods and services you buy from other companies. If you sell zero-rated items (for instance, children’s clothes) but pay the standard rate for most of your materials and manufacturing — you’ll be eligible for VAT refunds.
- Increased cash flow: If you’re charging more for your goods and services, you’ll have a higher cash flow rate. This is useful if you’re thinking of applying for future business investment.
On the other hand, VAT registration isn’t ideal for all businesses:
- VAT creates extra admin work: You’ll need to adhere to extra rules and record keeping. There’s also severe penalties for VAT errors. Make sure you can devote enough time to this, before registering.
- Your goods and services are more expensive: This could be an issue if most of your customers are non VAT-registered businesses or the general public.
- Sudden VAT bills: If your “output” VAT (i.e., the amount you collect from customers) is higher than your “input” VAT (the amount you pay to other businesses), you’ll need to pay the difference to HMRC. This can create cash flow issues for small businesses.
If you run your own business, startups.co.uk has a helpful introduction to VAT for self-employed people. With more information on cash accounting schemes, records and costs, you can weigh up the pros and cons for your business.
How do I avoid the VAT threshold?
It’s important to know you can’t “avoid” the VAT threshold.
If your business turnover exceeds £85,000, VAT registration is compulsory. If you don’t register, you’ll face significant penalties.
Nonetheless, there are some things you can do to remain underneath this threshold.
- You can purposely limit your turnover to less than £85,000. This could involve limiting your customer numbers or shortening your opening times. This isn’t the right approach for every business however, as it could have knock-on impacts for your long-term profitability and survival.
- You can apply for a VAT registration “exception”. If your taxable turnover temporarily exceeds the VAT threshold, you can apply for a registration exception. To do this, write to HMRC with evidence showing why your VAT taxable turnover won’t go over the “deregistration threshold” of £83,000 in the next 12 months. HMRC will let you know whether your application is successful. If not, they’ll register you for VAT.
- You might delay VAT registration by becoming a limited company. If a sole trader becomes a limited company (or vice versa), this resets VAT turnover. This might not be appropriate for your business though, as if you exceed the VAT threshold in any 12 month period (either as a sole trader or limited company), you’ll still have to register for VAT.
- You could split your business into two limited companies. If one or both parts of your business have turnover below the VAT threshold, it could result in significant savings. Each part of the business must be entirely separate though — with different staff, bank accounts, premises, websites and costs.
If you’re splitting a business, this can’t be for an “artificial” reason (such as purely avoiding VAT). In this case, HMRC will treat both businesses as one entity.
Nonetheless, multiple limited companies might be appropriate if a business is operating in new markets or offering different services.
Remember, if you’re running multiple companies, you’ll also have to complete two (or more) tax returns. So think carefully before taking any steps towards splitting your business.
Also read:
A Guide to Small Business Grants in the UK
Can a Sole Trader Have Employees?
How to Register as Self-Employed in the UK