Business owners must keep track of their business income on a monthly basis because growing businesses will most likely need to become VAT registered. The VAT registration threshold has been £85,000 since April 2017 and there are no plans to increase it in the foreseeable future. With businesses needing to charge higher prices to cover increasing costs more and more businesses are likely to breach the threshold.
With the threshold at £85,000 measured over a rolling 12 month period it means that business income can only reach on average just over £7,000 per month. A rolling 12 month period means the latest completed month plus the 11 previous months. It is easy to keep track of your income for each month by totalling the monies you have received and noting down the total for each month in a book or on a spreadsheet. Total the latest complete month and the previous 11 months to see if you have breached the threshold. Next month add in the latest month and remove the first month and see if that 12 month total has breached the threshold.
Often businesses only find out they went over the VAT threshold when their accountant completes their accounts and tax return and that could mean the business should have registered for VAT many months previously. But HMRC will not accept that as an excuse as you are responsible for keeping track.
The sooner you realise you have gone over the threshold the sooner you can sort things out. Don't ignore it as the longer you leave it the more VAT you will have to find to pay HMRC and you can't expect your customers to pay it for you if you didn't charge them VAT in the first place.
Once you have breached the threshold you have 30 days to register for VAT. So if you find you have gone over the threshold in November 2022, you will need to register from 1 January 2023. You will have to pay the VAT that you owe on your income from 1 January onwards and HMRC may decide to add a penalty charge.
It is not difficult to be VAT registered. It is a sign that you have a successful and growing business. There are different VAT schemes, one of which will work best for your business, and an experienced bookkeeper can get you registered and complete your returns for you with the information you provide.
The VAT flat rate scheme is often beneficial in this situation. Because you haven't charged any VAT you will have to fund the VAT payment yourself. The flat rate scheme allows you to pay a % of your gross income - the percentage varies from business to business - and for the first year of VAT registration the % agreed by HMRC is reduced by 1%. You will not be able to claim back VAT on any of your purchases using this scheme (unless you have made a capital purchase of over £2,000) so you will need to weigh up whether the flat rate scheme is most beneficial for you. You will also need to bear in mind that you can claim back VAT on purchases you have made in the previous 4 years, as long as you still own them, if you use a different VAT scheme.
More information on the flat rate scheme can be found on HMRC website.
If you have breached the threshold but it is a one-off situation you can apply for exemption from VAT registration.
Don't forget that the £85,000 includes all income which is taxable even if what you sell would be zero-rated, but it doesn't include income which is classed as exempt or not taxable i.e. loans or introduction of funds.
