Understanding the VAT Threshold
The VAT threshold is based on your taxable turnover—the total value of everything you sell that isn’t exempt from VAT—measured on a rolling 12-month basis. If your turnover goes over £90,000, you must register for VAT within 30 days.
Key points:
- Rolling calculation: Monitor turnover monthly, not just at year-end.
- Future expectations: If you expect to exceed the threshold in a single 30-day period, registration is immediate.
- Voluntary registration is available below the threshold and may benefit some businesses.
The Impact of VAT Registration
Pros
- Input VAT recovery: Claim back VAT on eligible business expenses, which can improve margins if your customers are mainly VAT-registered businesses.
- Enhanced credibility: Registered businesses may appear more established to clients and partners.
Cons
- Pricing complexity: You may need to increase prices by 20% for B2C customers, unless you absorb the VAT yourself.
- Increased admin: Quarterly returns, digital record-keeping (via Making Tax Digital), and new invoicing processes.
- Cash flow pressure: VAT is collected on sales, but sometimes owed before you’ve been paid—especially relevant for service-based or long-invoice-cycle businesses.
Proactive Strategies Before You Cross the Threshold
1. Monitor Turnover in Real Time
- Use cloud accounting or dashboard solutions to track rolling 12-month sales.
- Set up email alerts for when you get close to the threshold.
2. Forecast for Growth
- Include VAT impact in your financial models: How will charging VAT affect demand, cash flow, and bottom line?
- Plan price changes carefully—communicate clearly with customers about reasons for any increases.
3. Review Business Structure
- Consider whether your activities should be structured as one or more businesses (but beware: artificially splitting entities just to avoid VAT is against HMRC rules).
- Family businesses or multiple ventures under one owner might consider consolidation and register as a VAT group for simplicity.
4. Prepare Customers and Contracts
- For B2B: Warn clients in advance of VAT being added to future invoices.
- For B2C: Decide whether to absorb VAT (reducing margin) or pass it on (risking competitiveness).
Next Steps After Crossing the VAT Threshold
- Register promptly with HMRC, choosing the correct VAT scheme (standard, flat rate, cash accounting, annual accounting, etc.).
- Update invoicing: Issue VAT invoices with required details and display your VAT number on all paperwork.
- Switch to digital record-keeping: Use MTD-compliant software for all returns.
- Revisit pricing and margins: Use the opportunity to review costs, suppliers, and customer contracts to protect profitability.
Table: Key Considerations and Actions for SMEs Crossing the VAT Threshold
Step | Action | Tip |
|---|---|---|
| Monitor turnover | Use real-time software and monthly reviews | Automate alerts |
| Customer communication | Notify clients before VAT charges start | Transparent explanations |
| Pricing strategy | Decide: pass on or absorb VAT | Factor in profit margins |
| Choose VAT scheme | Research Flat Rate, Cash Accounting, Annual Accounting | Consult a tax advisor |
| Record-keeping | Move to MTD-compliant digital software | Trial before registering |
Conclusion
Approaching the VAT threshold doesn’t have to be daunting. With strategic planning, smart tech, and clear communication, SMEs can manage the leap smoothly—turning regulatory change into an opportunity for more robust, sustainable growth.
#UKVAT #SME #TaxCompliance #BusinessGrowth #MakingTaxDigital
Sources: HMRC VAT Guidance, ICAEW, Tax Policy Associates, AccountingWEB, Gov.uk VAT registration rules