How will my business be affected by the increase in the VAT registration threshold?

On 1st April 2024, the VAT registration threshold was increased from £85,000 to £90,000. It was one of several changes for small businesses announced in the Government’s Spring Budget, which included various measures on investment in SMEs and long-term growth.

Here we explain what this change could mean for you and your small business. If you need a more in-depth explanation of VAT and how to pay it, you can read our full guide to VAT for small businesses here, and if you’re unsure on any tax matters, speak to a financial advisor or tax specialist.

What is VAT?

VAT stands for Value Added Tax. It is a tax charged on goods and services provided by businesses in the UK. If you are liable to pay VAT, you must charge the applicable rate when providing goods or services to your customers. Then you pay the VAT collected to HMRC every quarter. 

When do I need to pay VAT?

The VAT registration threshold is now £90,000, which has increased from the previous threshold of £85,000.

The question of whether your business needs to register for VAT hinges upon your turnover, i.e. the total amount of sales your business makes on an annual basis.

Currently, if this figure is higher than £90,000, you will need to register your business for VAT and start charging it on the goods or services you provide. 

How much is VAT?

Once you’ve registered for VAT, you need to figure out which rates apply to the goods or services you provide. The standard rate of VAT is currently 20%, and this covers most goods and services. There are some exceptions however:

• Reduced rate – the reduced rate of 5% VAT applies to items such as domestic energy and children’s car seats.

• Zero rate – the self-explanatory zero rate (i.e. no VAT is charged) applies to a range of goods, including food, children’s clothing and books. 

If you need to start charging VAT for your goods or services then the details will need to be included on any invoices given to customers.

How will the increase in the VAT registration threshold affect my business?

The increase in VAT registration threshold means less small business will be automatically required to register for VAT. According to the Government, in 2024-25 more than 28,000 businesses will benefit from no longer being VAT registered.¹ 

For those with an annual turnover of less than £90,000, this will mean less administration, simplified finances, and a reduction in costs involved in VAT accounting.

If your turnover was less than £85,000, your business can earn a little bit more before you have to register for VAT.

What if my business is no longer eligible for VAT registration?

If your business turns over more than £85,000 but less than £90,000, VAT registration is no longer compulsory. 

If this is the case, you have two options:

1. Deregister from VAT

With the increase in VAT registration threshold, the VAT deregistration threshold has also increased from £83,000 to £88,000. This means that if your business’s turnover falls below £88,000, you are no longer required to register for VAT. 

You must ask HMRC to cancel your registration within 30 days of when you stop being eligible to be VAT registered.

2. Voluntarily register for VAT

In some instances, however, it may prove beneficial to voluntarily register for VAT even if your turnover is now under the £90,000 threshold.

The benefits of doing so include the right to claim back any VAT you have to pay out for goods or services from other VAT registered businesses. Plus, being VAT registered can help make your business appear more established.

Help with spreading the cost of your VAT bill

If paying a quarterly VAT bill puts a dent in your cash flow, you can spread it into monthly instalments using a FlexiPay line of credit. It can be used for a wide variety of payments including stock and invoices, and HMRC bills are one of the most popular uses among our customers.

To find out how FlexiPay can help spread the cost of your VAT bill, apply online in minutes.

08/05/24: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial, tax or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice. 
¹Spring Budget 2024