Managing VAT can be challenging for businesses of all sizes but understanding the rules and your obligations are essential. One key factor is the VAT threshold and what happens if you temporarily exceed this limit.
If you temporarily go over the VAT threshold, you will need to register with HMRC specifically for VAT and tell them the date when you went above the limit and the amount. You will then need to submit a backdated VAT return and pay the amount owed.
The current VAT threshold is £85,000 and it dictates the limit you can have in sales as a business before you need to register and pay VAT to the HMRC. For many small businesses, the threshold is not an obvious problem because they don’t earn enough to go over that limit.
If you are a company that is more often than not just below the threshold, however, and temporarily go over it, you may not be registered with HMRC at all. This means you could be potentially breaking the law and might be subject to a fine.
Here we look at what the VAT threshold is, what you need to do if you exceed the current limit and how to register with HMRC.
What is a VAT threshold?
The VAT threshold is currently £85,000. Your business can have a VAT taxable turnover up to this amount without having to pay any VAT. If you go over this amount within a 12-month period you usually need to register for VAT and the rules are quite strict about this.
According to the HMRC:
- At the end of any month, if you find that your turnover will exceed the VAT threshold over the last 12 months, you will need to register for VAT.
- This relates to VAT taxable turnover and not to total turnover.
- You have 30 days from noticing that you have breached the threshold temporarily to become VAT registered with HMRC. It is your obligation to maintain your accounts and recognise when you reach and exceed the limit.
However, if you go over the threshold temporarily and don’t expect this to happen again, you can apply to HMRC for an exemption. This means writing to HMRC and providing evidence that this is temporary.
VAT threshold for self-employed
The VAT taxable turnover threshold is the same for anyone who is self-employed as it is with limited companies. In other words, you will need to register for VAT if you breach the limit in any 12 month period.
Many sole traders and self-employed individuals don’t come close to reaching the point where VAT registration is required. A lot will depend on the type of business turnover you enjoy but certainly, private contractors can reach higher earnings where VAT might need to be applied.
How do I register for vat?
You can register for VAT online with the HMRC and this is the most convenient method for the vast majority of businesses. If you are self-employed, this is separate from the self-assessment but you can access the system through your normal gateway account.
You can choose to register for VAT even if you are not likely to go over the threshold although there is no obligation to do so. This can be advantageous if you deal with clients and customers that can reclaim VAT themselves.
There are some exceptions to registering for VAT online, for example, if you are joining the Agricultural Flat Rate Scheme or you are applying for different divisions of your business that need separate VAT numbers.
In these cases, submissions need to be on paper forms.
Once you have registered, you will get a unique VAT number and confirmation of when your registration starts and what date your first VAT submission needs to be given to HMRC.
You cannot start charging customers VAT or putting it on invoices until you have received your confirmation of registration.
What happens if you temporarily go over the VAT threshold?
It’s important not to ignore the fact that you are going over or have gone over the threshold and you will either need to register for VAT or contact HMRC for an exemption.
If you’re a new business and are successfully growing, it pays to make sure you have all the checks and balances in place to ensure you spot any breach of the taxable turnover limit as soon as it happens.
You may, for example, be a business that has a one-off client who takes you over the VAT registration threshold but this is unlikely to occur again at least not in the foreseeable future.
If this is the case, you may be able to get an exemption from HMRC rather than having to register.
There are two ways that you can do this. You can either register for VAT in the normal way or you can write to HMRC asking for an exemption.
You will need to provide evidence that your turnover is not likely to exceed £85,000 in the next 12 months and, if HMRC, agree an exemption can be given. If not, HMRC will register you for VAT.
If you fail to notify and you are found out, you could then be faced with paying penalties for both registering for VAT late and not telling HMRC in the first place.
Paying a penalty
Penalty rates are generally applied based on the amount of VAT that your business owes. For example, if you are 9 months late in notifying HMRC you can be charged 5% of the VAT due. There is a minimum penalty of £50.
HMRC can also charge for late payment. The way this is calculated is changing in 2023 and works on a points system. You can find out more here.
Do you pay VAT on profit or turnover?
Your VAT return is based on your turnover in any 12 month period. Profits play no part.
What happens if you charge VAT but are not VAT registered?
You cannot charge VAT customers unless you yourself are VAT registered. To do so is a breach of the law and can lead to prosecution.
Why is a company not VAT registered?
Companies can decline to register for VAT because their taxable turnover doesn’t meet the threshold. Some companies deal in exempt from VAT products and services which means they don’t need to register.
Temporarily going over the VAT threshold means that you either have to register with HMRC or ask them for an exemption.
It’s important not to ignore things if this happens as failure to notify HMRC can open you up to financial penalties depending on the amount of VAT you owe.
Want to find out more? Contact our expert team today.