The VAT threshold: Should it be changed, and do I need to register for VAT?

The current UK VAT threshold is £85,000. This threshold is due to stay in place until at least April 2016, meaning that by that time the VAT threshold will not have changed for at least 9 years.

On our advice line, we receive queries daily from businesses that want to remain below the VAT threshold, thus not needing to pass on the additional VAT to their customers and making them less competitive as a result. The main complaint, generally, is that the government has not increased the VAT threshold since 2017/18, therefore requiring more and more businesses to register for VAT.

The UK VAT threshold is one of the highest, certainly across Europe, with the one exception being Switzerland, with a threshold of 100.000 CFH (approximately £93,250). Yet the apparent perception of the current VAT threshold is that keeping the VAT threshold static is a stealthy method of requiring more businesses to register for VAT. Most comments we receive are along the lines of “the threshold should rise so that small businesses are not ‘caught’ by the requirement to register for VAT”.

There is also strong evidence to suggest that many businesses deliberately remain just under the threshold to avoid needing to register.

Raising the VAT threshold may be seen as a quick win for any government; however, there is potentially a stronger argument for reducing the VAT threshold, even going so far as to get rid of it altogether.

We regularly hear on the advice line that if the business needs to register, it will need to pass on the cost of VAT to their customers, which means they need to increase their pricing, making them less competitive against other businesses. This competition argument only holds true for those businesses that go over the threshold and are competing with similar businesses that are under the threshold and therefore not required to register. If all businesses, with perhaps the exception of very low-turnover businesses such as those operated as hobbies, were required to register for VAT, this argument would become null and void.

Of course, if greater numbers of businesses needed to register for VAT, this would require HMRC to deal with the additional number of VAT-registered traders, a fact that I’m not convinced many would have faith in HMRC being able to do successfully. However,  I’m sure lessons could be learned from those tax authorities who deal with a higher percentage of VAT-registered businesses. On the flip side, HMRC would need to spend less time investigating and considering failure to notify (late registration) and potential disaggregation cases.

Despite the advantages of reducing the VAT threshold, I very much doubt this will happen, given that this would be a very hard argument to sell to businesses and the public for any sitting government. There is also the fact that end consumers would probably end up bearing the burden of VAT added to the prices of small businesses, which in the current ‘cost of living’ crisis is highly unlikely to go down well.

With that being said, and with the Christmas and New Year festivities over and done with for another year, it’s worth checking with all those businesses that are not currently registered for VAT to see if they should be. This check should be done monthly based on the turnover for the previous 12 months. For those businesses that are already close to the VAT threshold, it is especially important to ensure this is checked on an ongoing monthly basis to ensure they are not late registering.

When calculating your VAT taxable turnover for registration purposes, you should include the value of all taxable supplies made in the UK, but you do not need to include the value of any exempt supplies or the value of the sale of any capital assets that you have sold. You should also include the value of any services purchased from overseas that are liable to reverse charge under the B2B general place of supply and the value of any acquisitions (if you acquire goods into Northern Ireland).

More detailed guidance on how to calculate your VAT taxable turnover for registration purposes can be found in HMRC’s VAT Notice 700/1, Who Should Register for VAT? (Who should register for VAT (VAT Notice 700/1) – GOV.UK (