What is the VAT limit?

The VAT threshold is the amount of annual turnover with which companies must register for VAT (VAT).

The current limit for VAT registration in the UK is £85,000. The government has said that this threshold, in place since 2017, will remain unchanged until 31 March 2024.

VAT limits for previous years are as follows:

• 2014–2015 – £81,000
• 2015–2016 – £82,000
• 2016–2018 – £83,000
• 2019-2024 – £85,000

When your company’s turnover reaches the VAT threshold, you have 30 days to register for VAT with HMRC. Once this process is complete, your company has additional responsibilities, including:

• Collection of VAT on your products or services
• Payment of VAT on the goods or services provided by your suppliers
• Submit your VAT return to HMRC every year
• Maintenance of VAT accounting and accounting

VAT registration

Registration for VAT is a legal requirement for businesses that exceed this threshold and the threshold is regularly reviewed by HMRC.

You must register for VAT if your small business has earned more than the VAT threshold within a 12-month period, or if you expect your taxable turnover to pass the VAT registration threshold within the next 30 days.

The 12-month period in question does not necessarily have to coincide with the tax year. You should regularly check whether your VAT-liable turnover for a given 12-month period has passed the current VAT registration threshold.

Pro tip: Even if you have just passed the VAT registration threshold of £85,000, you must register within 30 days of the end of the month in which you passed the threshold. It’s important to keep a close eye on your revenue at least on a monthly basis, especially as you approach the threshold.

Is the VAT threshold for turnover or profit?

The VAT limit is measured on turnover. Your turnover is the total value of everything you sell that is not exempt from VAT.

VAT-free goods and services include:

• Education and training
• Health care and medical treatment
• Funeral plans, burial or cremation
• Antiques

Zero-rated goods and services include:

• Incontinence products, pregnancy pads, hygiene protection
• Books, magazines and newspapers
• Baby clothes
• Children’s clothing and footwear
• Bicycle helmets

Different VAT rates

Name	Current rate	Description and examples
Standard	20%	The standard rate of VAT is the standard rate – this is the rate charged on most goods and services in the UK, unless they are specifically identified as reduced or zero-rated.
Reduced	5%	Household fuel and electricity, insulation of energy-saving materials, child car seats, etc.
Zero	0%	Food (but not meals in restaurants or takeaways), books/newspapers, children’s clothes/shoes
Exempt	reach	VAT-free goods and services such as antiques, health care and funeral services may not be subject to VAT
Outside the box	reach	Items completely outside the UK VAT system include MOT tests

How to calculate the VAT limit

You can calculate your annual taxable turnover by adding up your total sales (excluding VAT) across your products and services in the most recent financial year (April to March).

For example, if you sold £60,000 worth of goods over 12 months and £30,000 of services, then your total taxable turnover would be £90,000.

Because you’ve passed the £85,000 VAT threshold, you’ll need to register for VAT and start charging it on applicable goods and services sold from that point onwards.

Sole proprietorships and VAT – Whether you pass the VAT threshold or register for VAT voluntarily, we explain everything you need to know about VAT

What if it’s just a blip?

It is possible that your business will cross the VAT threshold, but only on a temporary basis. Therefore, it is possible to request that your small business have a registration “exemption”, which means you do not need to register for VAT.

This VAT registration exemption is something you have to apply for – it’s not enough to say nothing and argue the case later.

Write to HMRC and explain the circumstances of why you are applying for permission not to register. Reasons for not being VAT registered, even if you have exceeded the VAT threshold, include:

• Crossing the VAT line was a one-off event
• That there is no likelihood that you will cross the VAT threshold again in the near future

You must also provide documentation to support your case.

Pro tip: Even if HMRC accepts your application for VAT exemption, remember that it is a one-off and not an ongoing exclusion. You must still be registered for VAT if your turnover again exceeds the VAT limit.

Registration for VAT is voluntary

You can still register for VAT voluntarily even if your taxable turnover does not exceed the VAT registration threshold of £85,000.

The advantage of this is that you will be cheaper if your customers are also VAT registered. They can reclaim VAT on everything they buy from you, which saves them 20 percent compared to if you were not VAT registered.

It is estimated that around 20 per cent of all VAT-registered companies trade below the VAT registration threshold.

Also, if you’re just starting out and you know you’ll hit the £85,000 VAT threshold quickly, or you’ll mostly be selling to VAT-registered businesses, you can claim your VAT on the cost of setting up – saving you money in the short term.

Do subsidies count towards the VAT limit?

Grant funding is typically outside the scope of VAT.

How do I pay VAT to HMRC?

Of course, you can just hold your nose and hand over 20 percent of your turnover to the tax authorities, but there are legitimate and official ways to reduce your VAT bill and even out payments to help cash flow:

• Fixed rate scheme – If your annual turnover is less than £150,000, you can join this scheme to pay VAT to HMRC at a fixed percentage of turnover, depending on the industry. The VAT rates under the fixed scheme vary from 4 per cent. to 14.5 per cent compared to 20 per cent. standard rate. If you are part of the Flat Rate Scheme, you must leave when your turnover exceeds the mandatory exit threshold of £230,000.
• VAT Cash accounting scheme – This works in the same way as ordinary cash accounting, where VAT is paid and posted when money changes hands, rather than when an invoice is received. To participate in the VAT Cash Accounting Scheme, you must have a taxable turnover of £1.35 million or less. There is a mandatory opt-out threshold and you must leave the scheme if your taxable turnover is more than £1.6 million.
• Annual accounting scheme VAT – Under the annual accounting VAT scheme, companies submit one VAT return per year and make advance payments to their VAT bill. You can join the scheme if your taxable turnover is £1.35 million or less. Businesses participating in the Annual Accounts Payable Scheme must exit when their turnover passes the £1.6 million deregistration threshold.

How to stay under the VAT limit

If you are a tradesman in particular, having to pay your customers an additional 20 percent is not very palatable – it puts you at a disadvantage compared to the competition.

One way to stay under the threshold is to divide your business into two or more separate businesses, according to Checkatrade, but each part of your business must offer different services to make the difference clear. It is also useful to have separate bank accounts for each business.

Sole proprietorships increasingly avoid charging VAT – Tens of thousands of small businesses deliberately stay small to avoid charging VAT, meaning you have to raise prices if you go over the £85,000 threshold

More about VAT

Import duty and zero VAT-rated goods – If I want to import zero-rated goods, do I still have to pay import duties on them? Where can I find more information about this?