As a small business owner in the UK, we’re sure you’re all too aware of the constant juggling act required to keep your enterprise thriving. Among the many hats you wear, one of the most crucial is understanding and managing your tax responsibilities. And with the recent adjustments to Value Added Tax (VAT) thresholds, as of 1st April 2024, the ground beneath small businesses in the UK has shifted once more. The VAT registration threshold has been raised to £90,000, while the deregistration threshold now sits at £88,000. But what does this mean for you and your business?

For those who may not be familiar, VAT can seem like just another financial hurdle to navigate, and another bill to pay. Yet, it’s more than just a tax – it can also present opportunities for cost savings, increased cash flow, enhanced credibility and business growth. In this blog, we’ll untangle the main VAT question; “To VAT or not to VAT?” for UK small businesses. From understanding the new thresholds to weighing up the pros and cons of VAT registration, we’ve got you covered. We will make sure

you’re equipped with all the information you need to make an informed choice for your business’s future.

Please note: This blog provides information for general guidance only and should not be considered as professional tax advice. Tax laws and regulations are subject to change, and their application can vary widely based on the specific facts and circumstances involved. We encourage readers to consult with a qualified tax professional to ensure compliance with current laws and to receive advice tailored to their particular situation.

Understanding the New VAT Thresholds

Firstly, let’s explore exactly what’s changed this April:

Registration Threshold Increase

The VAT registration threshold has now risen from £85,000 to £90,000, which means that if your business makes over £90,000 in taxable sales within a 12-month period, you’re required to register for VAT. This involves charging VAT on your sales and submitting VAT returns to HM Revenue and Customs (HMRC). On the other hand, this means that businesses with a turnover of £90,000 or less are not required to register for VAT.

Deregistration Threshold Increase

Similarly, the threshold for deregistration has also seen an increase, rising from £83,000 to £88,000. Businesses may apply for deregistration if their taxable turnover falls below this amount within a 12-month period. Deregistering means you no longer need to charge VAT on your sales or submit VAT returns, which can simplify your administrative tasks.

Northern Ireland Specifics

In Northern Ireland, the registration and deregistration thresholds for acquisitions have also been adjusted. They are now aligned with the changes in the rest of the UK, by increasing from £85,000 to £90,000.

The Strategic Importance of VAT Registration

Unlike other business taxes, where you just hand over your hard-earned cash, you might be surprised to hear that there are instances where voluntarily opting into VAT registration can make good business sense. Let’s take a look:

Cash Flow Boost

VAT registration offers a practical way for UK small businesses to improve their cash flow by reclaiming input tax. When you become VAT-registered, you’re allowed to claim back the VAT you’ve paid on your business expenses. This includes things like equipment, supplies, and services you purchase for your business. For example, if you purchase inventory for £1,000 with a 20% VAT rate, you’ve paid £200 in VAT. However, as a VAT-registered business, you can claim back that £200 when you file your VAT return. 

This means more money stays in your business rather than going to the taxman. By reclaiming input tax, you effectively reduce the overall amount of VAT you owe, which can provide a significant boost to your cash flow. This extra money can be reinvested into your business to fund growth, cover operational costs or simply provide a buffer for a rainy day. The ability to reclaim VAT on these expenses can be crucial for maintaining healthy margins and remaining competitive.

This can be particularly beneficial for businesses with high expenses, which may incur significant costs for raw materials, inventory, equipment or subcontracted services.

Perception and Trust

VAT registration not only has financial benefits but also helps enhance credibility and professionalism for UK small businesses. When you’re VAT-registered, it sends a signal to your clients, suppliers and partners that you’re a legitimate and established business. This can go a long way in building trust and attracting new opportunities for your business, ultimately contributing to its long-term success.

This is especially important for those working in the business-to-business (B2B) sphere, where trust and credibility play a crucial role in decision-making processes. In B2B transactions, businesses often rely on each other to deliver goods, and services, or fulfil contractual obligations. Therefore, having the reassurance of dealing with a VAT-registered partner can provide peace of mind, knowing that they are operating within legal frameworks and are less likely to pose financial or regulatory risks. Additionally, VAT registration facilitates smoother transactions by enabling businesses to issue VAT invoices, which are often required for accounting and tax purposes.

Preparation for Growth

What’s more, voluntarily registering for VAT can be a strategic move for businesses anticipating growth. Voluntarily registering for VAT allows businesses to prepare for expansion without facing the last-minute rush or potential penalties associated with late registration. By taking this proactive step early on, businesses can smoothly integrate into the VAT system as their turnover grows, ensuring compliance with tax regulations from the outset.


Considerations for VAT Registration Decisions

By understanding and leveraging the benefits of VAT registration, you can turn what may initially seem like a bureaucratic hurdle into an opportunity to strengthen and grow your business. However, whilst VAT registration can come with many potential benefits, it’s essential to weigh these advantages against the potential challenges and considerations involved.

Here are some key points to keep in mind:

Impact on Pricing

Charging VAT on your sales can really shake up your pricing strategy. Depending on your market and competition, you may find it necessary to tweak your prices to accommodate the VAT you now need to charge – and this adjustment can directly affect how competitive your business is, and how much profit you bring in. This is particularly crucial for business-to-consumer (B2C) businesses to think about, as consumers tend to be more sensitive to price changes and lack the option to reclaim VAT.

For B2C companies, tacking VAT onto their existing prices might mean losing out on some competitive edge. But if they try to absorb the VAT without raising prices, it’s their profit margins that take a big hit. So, if you’re considering voluntary VAT registration, this is a crucial consideration that can’t be overlooked.

Administrative Burden

Another key downside of voluntary VAT registration is the extra paperwork and administrative hassle it brings. Once you register for VAT, you’re not just collecting the tax from your customers – you’re also responsible for keeping meticulous records of your transactions, filing VAT returns on time, and potentially facing audits. This administrative burden can eat into your time and resources, especially if you’re a small business with limited staff and funds.

Plus, VAT regulations can be complex and subject to frequent changes. Staying up-to-date with these rules and understanding how they apply to your business can be challenging, especially for small business owners who may not have specialised tax knowledge. So, before jumping into voluntary VAT registration, it’s crucial to consider whether you’re prepared to handle the added paperwork and compliance requirements.

The Bottom Line

Deciding to register for VAT is a pivotal moment for UK small business owners, serving as a double-edged sword that can offer significant benefits like improved cash flow, enhanced credibility, and a smoother path to growth, but also bring challenges such as impacting pricing strategies and increasing administrative tasks. With the new VAT registration and registration thresholds now in place, businesses must weigh these pros and cons carefully. 

Our parting advice? Don’t go at it alone. The VAT world is intricate, with twists and turns that can trip up even the savviest business owners. Getting professional advice and guidance can help you navigate the VAT maze, ensuring you comply with regulations while harnessing VAT’s potential benefits for your business.

Navigating the VAT maze can be tricky, but you don’t have to do it alone. Elliott Gaspar, our Founding UK Director at Standard Ledger UK, is just a call away. Book your free, no-obligation chat today and let’s explore how we can tailor our bookkeeping and accounting services to fit your unique needs, helping you focus on what you do best – growing your business.

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