For most business owners, the Value Added Tax (VAT) is a source of administrative pain. VAT is a consumption tax charged by businesses on goods or services at the point of sale, paid by the end consumer instead of the company that sold the goods or services. This is why it takes a lot of administrative work to record VAT correctly. Failing to do so correctly and accurately may incur your high business costs.
In the United Kingdom, a business has a choice to voluntarily register for VAT unless the business’s turnover is more than the VAT registration threshold, which is currently at £85,000. There are also different VAT rates applicable to different types of products. There are certain types of products that are VAT exempt. However, VAT applies to almost all goods, services, transactions, and businesses.
To help you and your business navigate through the ins and outs of VAT taxable turnover, we’ve put together this short guide for you.
But first, what is the difference between a business’s turnover and its profit?
Most business owners are often confused with the difference between their business’s turnover and profit. These two are actually very different things.
Simply put, profit refers to the amount that remains after the business has paid all of its necessary expenses. The turnover, on the other hand, is the net amount over a certain period of time. In the case of a taxable turnover, this refers to the previous 12 months or any 12-month period, and not necessarily the tax year or fiscal year.
What is a VAT taxable turnover?
The VAT taxable turnover is a business’s total value of sales that is subject to tax after VAT exempt amounts are removed. Understanding this value is crucial in the UK because a business’s VAT taxable turnover determines whether it is required to register for VAT or not.
How are the VAT taxable turnover and threshold related?
When your turnover exceeds the VAT threshold, which is currently at £85,000, your business is required to register for VAT. However, for those with turnovers less than this amount, business owners have the choice of whether they should register for VAT or not.
What should be included in a VAT taxable turnover?
When determining a business’s taxable turnover, the HM Revenue & Customs (HMRC) has a clear list of items that should be included. The list consists of the following:
- Goods and services obtained for your business as gifts or through barter or exchange
- Goods loaned or rented to customers
- Goods for the business that is also for personal use
- Goods received from outside the UK that fall under the “reverse charge.”
- A building that’s for your business or that’s been done by your business amounting to more than £100,000
- Zero-rated items
What is excluded in a VAT taxable turnover?
As a business owner, you might have other streams of income for your business. There are some cases when entire income streams are VAT exempt. The exemption applies to the following items:
- Income earned through financial services or insurance sales
- Income earned through rental properties or building sales
- Income earned through lottery, betting, or gaming
There are also some cases when items or supply streams aren’t included in the taxable turnover. The exemption applies to the following items:
- Goods or services from the UK that are tax exempt
- Goods or services supplied to customers outside the UK
- Services your business were supplied that originated outside the UK
- Income that is considered outside the VAT scope
You will also need to check the industry that your business is in, which can impact which income is excluded and should be included in your business’s taxable turnover. When in doubt, it is always best that you consult with an accountant to look into your business and your taxable turnover.
What happens when my VAT taxable turnover goes over the VAT threshold?
If your business’s taxable turnover exceeds the VAT threshold, which is currently at £85,000, it is required that you register your business for VAT. VAT registration can be done simply through the HMRC. But if your turnover exceeds the threshold temporarily, the HMRC may also allow you an “exception from registration”.
It is also important to remember that you have 30 days to inform HMRC that your taxable turnover for the past 12 months falls above the VAT threshold. If you fail to do this within the given period, you will face penalties or fines when you register for VAT beyond the deadline. Your business’s effective date of registration is the date you realised you went over the threshold and not the date your turnover went over it.
Once you are VAT registered, you also have to remember that your business’s registration will impact the VAT expenses your business can reclaim and the prices of the goods or services that you will be offering your customers.
If I temporarily go over the threshold, how do I get an exception from the HMRC?
If your business’s taxable turnover temporarily goes over the threshold, which happens especially in small businesses and startups, you can apply for a registration “exception” from the HMRC. What you have to do is to write them, attaching evidence that shows why you believe your business’s VAT taxable turnover will not go over the threshold in the next 12 months.
The HMRC will consider your request for an exception and send you a confirmation if you get one. However, if you don’t, they will automatically register your business for VAT.
As is with other financial aspects of your business, it is always best to consult with an accountant, especially with anything related to taxes. When in doubt about which items you should include and which items are VAT exempt, you may consult them to ensure that you don’t make a mistake. Remember that any mistake you overlook may result in expensive tax penalties for your business.
Related VAT Articles
- What is Annual Accounting VAT?
- Should My Small Business Use the Flat Rate VAT Scheme?
- 7 Steps to Making a Profit First Instant Assessment with VAT
- 5 Things You Should Know About Late VAT Payments – What Happens if I Missed the Deadline?
If you want to know more about what it’s like to work with a Chartered Accountant and Certified Profit First Professional, feel free to reach out to Annette & Co. We’d love to give you some FREE advice on your current business practices!