In a move welcomed by many small business owners, the VAT registration threshold in the UK is set to increase from £85,000 to £90,000 from April 2024. While this change may sound relatively minor, it could have significant implications for thousands of UK businesses—particularly sole traders and SMEs operating just below or above the existing threshold.
What Is the VAT Threshold?
The VAT registration threshold is the point at which a business must register for VAT with HMRC. Once registered, businesses must charge VAT on their goods and services, file VAT returns, and pay any VAT due.
For many small businesses, particularly those operating on slim margins, crossing the VAT threshold can mean price increases or reduced competitiveness.
Why Is the Threshold Increasing?
The government has cited inflation as the key reason for the change. Raising the threshold to £90,000 is designed to prevent small businesses from being dragged into VAT registration purely due to the effects of rising prices.
It is also intended to encourage entrepreneurship and remove barriers to growth for sole traders and SMEs.
Who benefits from the change?
Around 28,000 businesses are expected to benefit immediately, as they will no longer be required to register for VAT or can choose to deregister. This could mean:
- Reduced administration and compliance costs
- Improved cash flow
- More competitive pricing (if VAT previously had to be added)
Potential downsides to watch out For
However, the threshold change could also have unintended consequences:
- The ‘Cliff Edge’ Effect: Businesses just below the threshold may still limit growth to avoid VAT registration, a phenomenon known as ‘bunching’.
- Complexity for Deregistered Businesses: Some may need to consider whether deregistration is worthwhile or if they’re likely to exceed £90,000 turnover soon.
- Lost VAT Reclaim: Deregistering businesses lose the ability to reclaim VAT on purchases.
What Should Small Businesses Do Now?
Review Your Turnover
Businesses should monitor turnover closely to see if they fall below the new £90,000 threshold. Those currently registered just above £85,000 may now have the option to deregister.
Consider the Pros and Cons of Deregistration
Deregistering can save time and reduce accounting costs, but the ability to claim back VAT on expenses is lost. If a business sells mainly to VAT-registered companies, deregistering may not provide much advantage.
Assess Growth Plans
If a business is growing rapidly, it may be better to stay VAT registered to avoid the hassle of deregistration and re-registration.
Speak to Your Accountant
Every business is unique. A discussion with your accountant can help you weigh up the pros and cons and decide the best course of action.
The VAT threshold increase is positive news for some businesses, but not a reason to stop monitoring turnover. Proper planning is crucial to ensure that decisions around VAT registration align with growth ambitions and long-term goals.
Please get in touch with us if your situation is unclear and you would like to discuss this further.