You must register your business for VAT if you exceed the threshold in any 12-month rolling period, or know that you are going to exceed it. The current VAT threshold (2016/17) is £83,000, so if your VAT taxable turnover has exceeded this amount at any point during the last 12 months, you should register with HMRC within 30 days.
Your VAT taxable turnover is the total of all sales that aren’t exempt from VAT. You can also register voluntarily if turnover is below the threshold, but it is worthwhile for your business - there can be advantages to doing this depending on the type of business you run.
A mistake commonly made by business owners when deciding whether to register, is taking the total turnover figure at the end of the financial year. Instead, you should add each monthly figure for sales to the previous 11 month total.
What happens if you go over the threshold and don’t register?
Failing to register when you’ve exceeded the threshold has serious ramifications, including severe financial penalties. A lack of knowledge about the system, or claims that your calculations were incorrect won’t be accepted by HMRC as a reason for non-compliance.
Some businesses receive poor advice or insufficient guidance on VAT from their accountant, but it’s worth remembering that as the business owner, you’re solely responsible for ensuring that HMRC demands are met.
How are the penalties calculated?
Penalties for failing to register when you’ve exceeded the VAT threshold are based on the length of delay, and calculated as a percentage of the VAT that you owe:
- Nine months or less: 5%
- Over nine months but no more than 18 months: 10%
- More than 18 months: 15%
You’ll be notified in writing about the penalty, but you have a right of appeal within 30 days from the date on the notification letter.
Other VAT thresholds
Various VAT accounting schemes exist that make it easier for certain businesses to meet their reporting obligations. Each of these schemes has its own VAT threshold:
- Flat Rate Scheme
This is a scheme whereby you pay a fixed rate of VAT to HMRC - the threshold is £150,000 or less.
- Cash Accounting Scheme
The threshold for the cash accounting scheme is £1.35 million or less. If your business is eligible, you pay over VAT when you’ve been paid by your customers, and reclaim it when your suppliers have been paid.
- Annual Accounting Scheme
With the annual accounting scheme you submit one VAT return each year, and make advance payments of VAT based on the previous year’s return, or on estimations for new businesses. The threshold is £1.35 million or less.
Handpicked Accountants can recommend a qualified and trusted accountant to advise on VAT matters. We only refer accountants with whom we have a long-standing working relationship, so you can be sure they are reliable and experienced.