How to stay under the VAT threshold

VAT is something most tradespeople are aware of and whether or not to become VAT registered is a key consideration for every business. In order to run a successful company, you’ll need to know your responsibilities when it comes to paying and charging VAT.

This article covers vital issues like:

• What happens if you go slightly over the VAT threshold
• Whether being VAT registered is the right choice for your business; and
• How to split your business to avoid VAT.

Key info about VAT

Ok, before we dive into how to stay under the VAT threshold, let’s take a closer look at what VAT is.

VAT stands for Value Added Tax and is added when goods or services are sold in the UK. You’ll usually pay VAT when buying from your favourite store or you may need to add VAT to the cost of your services.

Knowing whether you need to register to pay VAT depends on your business turnover in the last 12 months.

The VAT threshold is set at £85,000, so if your turnover exceeds this amount, you’ll need to become VAT registered.

Do I need to charge VAT?

VAT is applicable to all taxable supplies and will be charged at the standard rate of 20%. Some goods are only chargeable at a reduced rate of 5%, or even 0% where no VAT is levied.

It’s important you’re aware of how much to charge and when to do so.

Do I need to charge VAT on EU sales?

If your business exports to the EU, you’ll need to work your way around the UK and EU’s VAT regulations. Goods and services sent to the EU are zero-rated, meaning no UK VAT is payable.

However, for exports to some EU nations, you may need to register and account for VAT in the country of supply. The lowest standard VAT rate in the EU is 15%. If your customer is VAT registered in their respective EU country, they will most often still be able to claim the VAT back.

Do I need to charge VAT on shipping?

VAT is charged on most shipping in the UK, with the exception of the delivery costs for zero-rated goods, such as children’s clothes and footwear, water, basic foods, books and newspapers.

Remember, postage is considered a business expense, so you can claim it back.

How to register for VAT

You can register in three ways, these include:

• Online
• Through an agent or accountant
• By post

When to register for VAT

If you’ve seen your business has got super busy and profits are flying, you will likely be wondering at what point you need to register for VAT. It depends on your current turnover. If you know that you’ll reach £85,000 in a 30 day or 12-month period, you are legally required to register to pay VAT.

Note: The threshold applies to a rolling 12-month period, not just your accounting period.

Why register for vat voluntarily?

It’s a great question, because it may benefit some businesses!

To find out more on this topic, check out our blog from Powered Now’s CEO Ben Dyer:

Why register for vat voluntarily?

Do I need to charge VAT if not VAT registered?

It’s illegal to charge customers VAT if you’re not VAT registered. Doing so raises the amount a customer has to pay and unlawfully increases profits. HMRC penalises businesses that illegally charge VAT.

If you accidentally charge a customer VAT without being registered, handle the situation immediately. Inform your customer, issue a VAT refund and inform HMRC of the situation. While this may still incur a penalty, being open and rectifying your mistake can result in the fine being as little as 10% of the VAT invoiced.

On the other hand, failing to inform HMRC could mean an invoice for 100% of the VAT charged. It’s always best to be honest in these situations.

VAT registered vs non-VAT registered

The big advantage comes when you are selling to other businesses that are VAT registered. In this case, they will be able to claim back any VAT that they pay.

You would think that they are neutral when it comes to whether you are VAT registered, but that isn’t the case,

Let’s look at the same case as above when you are VAT registered and selling to another VAT registered business.

Firstly, the situation when you are NOT VAT registered:

• You charge £1,200 + £2,000 = £3,200 which you get paid for
• You pay £1,200 to the supplier
• So, you receive £2,000 net
• Your customer cannot claim back any VAT so they are £3,200 out of pocket.

However, when you are VAT registered:

• You charge £1,200 + £2,000 + VAT = £3,600 which you get paid for
• You pay HMRC £600 – £200 = £400
• You pay £1,200 to the supplier
• So, you receive £2,000 net
• Your customer can claim all their VAT back of £600 so they are only £3,000 out of pocket.

Your customer ends up paying less. That’s good.

How to stay under the VAT threshold

There are a few ways to stay under the VAT threshold, one of which involves splitting your business to avoid VAT. You can break your company down into two or more separate businesses, but each part of your company needs to offer different services to make the distinction clear.

You should also consider having separate bank accounts and you’ll need to complete two or more tax returns.

How to avoid paying VAT as a business

Knowing how to avoid paying VAT as a business can be handy when it comes to keeping prices for your services competitive. When you become VAT registered you won’t pay the VAT yourself – your customers will pay this instead – meaning you need to charge more. If you do need to charge VAT, this money will actually go to the government, and you’ll just collect it on their behalf.

In addition, you can reclaim any VAT your business has paid on expenses over the same time period.

You can avoid paying VAT by making sure your business earns less than the £85,000 threshold.

Other ways to prevent your company from paying VAT are to avoid getting your customers to purchase materials themselves, not taking large one-off payments, and operating on fewer days a week.

Going temporarily over the VAT threshold

If your business goes temporarily over the VAT threshold you may be able to ask the HMRC for an exception. Make sure this is submitted in writing less than 30 days after you go over the £85,000 threshold.

Do I have to charge VAT as a sole trader?

There is the same VAT threshold and conditions for sole traders as there are for other business structures. Having full control of your business activities and organisation means VAT registration will be your responsibility.

As sole traders oversee calculating, charging and transferring VAT to HMRC, it’s crucial to have a thorough understanding of the process.

VAT reverse-charging for building and construction services

The VAT reverse charge was brought in on 1^st March 2021 as an anti-fraud measure. It prevents building and construction providers from absconding with the VAT they collect from customers.

You can ensure you are aware of your responsibilities by reading our guide on VAT reverse charge for building and construction services.

Checkatrade members get an invoicing app for free

All Checkatrade members get free access to Powered Now’s invoicing app, 1 Trade App*.

The 1 Trade App allows you to manage your business on the go, create nice looking invoices and quotes, and lets customers pay you quickly.

Or, you can get 50% off if you upgrade to the full Powered Now app in your first year with Powered Now**.

The upgrade to Powered Now adds team scheduling and tracking, the ability to accept card payments, and to submit VAT returns directly to HMRC.

There are many other benefits to becoming a Checktrade member, including savings on insurance, vans and discounts at wholesalers.

FAQs

Can I register for VAT if my turnover is below the threshold?

Yes, as a precaution, you can register to pay VAT before your turnover exceeds £85,000. If your company doesn’t pass the threshold, you can also de-register from paying VAT.

Should I stay under the VAT threshold?

This is a great question, and many tradespeople wonder if it is better to be VAT registered or not. There are both advantages and disadvantages to staying under the VAT threshold, as shown below:

• Disadvantages: You’ll need to fill out more paperwork, your customers may not be happy to pay higher prices and your cash flow may be affected.
• Advantages: You get to reclaim any VAT you have paid to other companies and your business will appear more credible to customers.

If you’re unsure about whether or not to register for VAT, we have an excellent guide covering the different considerations. Check out our should I become VAT registered guide to learn more.

What happens if you go slightly over the VAT threshold?

If your turnover goes over the VAT threshold, you’ll need to register to pay VAT within 30 days. Thankfully, you’ll only pay VAT from your registration date, but if this is incorrect, the HMRC will charge you VAT from when you should have registered.

Do you pay VAT on profit or turnover?

VAT is charged on your company’s turnover, not profits.

How to stay under the VAT threshold checklist

• The VAT threshold is £85,000 and if your company turnover exceeds this, you’ll need to register to pay VAT.
• You can stay under the VAT threshold by splitting your business, working fewer days, or not taking big one-off payments.
• If you go temporarily over the VAT threshold you may be able to apply for an exception.
• There are both advantages and disadvantages to being VAT registered so take everything into account before making your decision.
• Becoming a Checkatrade member is the best way of protecting your business and increasing your workload. We have a number of different membership options for every business.

What are the benefits of becoming VAT registered?

Many companies decide to register for VAT before they reach a turnover of £85,000, as this allows them to reclaim the VAT on company purchases. There are savings to be made on expenses such as work laptops or mobile phones, workwear and even your daily sandwich. This is due to the fact that the VAT you pay can be re-claimed against VAT charged to clients.

Some also see it as a mark that the business is performing well and register for VAT to emphasise to potential customers that they’re a professional operation.

Please note that the threshold applies to a rolling 12 month period, not a 12 month accounting period.

What are the downsides to becoming VAT registered?

Being VAT registered does mean more paperwork (which is bad news for those who find admin a chore!). You’ll need to make sure you add VAT to all your client invoices and keep all your VAT invoices and receipts for any company expenses. You’ll also have to submit a quarterly or annual VAT return.

If you’re regularly up against non-VAT registered companies when you quote for jobs, it could be better not to become VAT registered so you can keep your prices more competitive.

You will need to keep a running total of sales, especially if you are nearing the £85,000 threshold. Failure to do so could result in big penalties.

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