VAT Threshold UK: What Happens if You Go Above VAT Threshold?
If you’re an e-commerce, tech, or financial service company or operate in any other sector, demand for your goods or services can suddenly increase. For example, demand for gifts tends to rise during holiday periods such as Mother’s and Father’s Day as well as during the Christmas period.
Your business may exceed the Value-Added Tax (VAT) threshold – currently, £85,000 – during such periods. This is a common occurrence for new as well as more established businesses.
Going above your VAT threshold can happen, and this can equally be overlooked if your business does not understand VAT rules.
In this article, we will look at what happens when you go above your VAT threshold. A few points to remember and how to deal with late submissions or late payments.
The article concludes with frequently asked questions to ensure that you make informed decisions about your company’s taxation and avoid hefty fines from HMRC.
What can I do if I go over the VAT threshold?
As a business or entrepreneur, the first thing you want to do is establish exactly what month or year you exceeded your VAT threshold. After establishing the date when you exceeded the VAT threshold, you should register for your VAT immediately.
This should cover the date when you first exceeded your VAT threshold and it is preferable that you register well before and not after you exceed the HMRC threshold.
You may be required to pay this in addition to hefty fines if you are investigated by HMRC and your VAT exceeds the threshold prior to registration, you will be required to pay this, and this may equally come with hefty fines.
Once registered and after having obtained a VAT number, you should complete all the VAT returns and make sure all the income earned during and before your VAT exceeds the threshold is declared.
Remember that all “Vatable” purchases should equally be declared to ensure that your business benefits from tax breaks or incentives for businesses in your category. You may submit a manual VAT return to cover all the back-dated returns under the Making Tax Digital Scheme.
Once updated on the accounting software, HMRC will realign all past returns whilst ensuring that all future returns can be submitted digitally.
Few points to remember if you find yourself in this situation.
- Make sure you check the current VAT threshold
- The VAT threshold is calculated on a 12-month rolling basis and not the financial year or tax year.
- Make sure you are voluntarily registered well in advance to avoid surprises and hefty fines from HMRC
- Registration should backdate to the period before you went over the threshold
- If you volunteer, you may be investigated but will pay fewer fines than if HMRC found out.
What if I temporarily go above the VAT threshold?
If your turnover exceeds the VAT threshold and you are certain that this is a one-off event or temporary, you are entitled to ask HMRC for a VAT exemption. In order to do this, you must send a written request to HMRC within 30 days after you first exceed your VAT threshold.
If you are certain that this situation was temporary;
- You must show the HMRC proof that you will not exceed your VAT threshold in the next 12 months.
- HMRC will then inform you if they grant you a waiver or if you are required to register.
What about late submission or late payment?
To determine your penalties, HMRC looks at your turnover and how many times you have submitted your VAT late. For every late VAT submission or payment, HMRC will record a default.
The surcharge is based on the percentage VAT that is due for that quarter. If the value of the VAT is unknown to HMRC, they will likely estimate the surcharge.
How can I avoid hefty payments?
You may ask for an exception whilst notifying HMRC that you are unlikely to exceed your VAT threshold if the VAT breach was a one-off.
You can also make sure that you are voluntarily registered if you are uncertain about the likelihood of your sales exceeding the VAT threshold in the future. You may equally deregister if your turnover remains below the VAT threshold.
How do I de-register?
To deregister, check the VAT threshold, which is lower than the registration threshold. You may only deregister if you are going out of business, stopping all operations in the U.K. In some cases, you may deregister if you are certain that your sales will stay below HMRC’s threshold.
- Deregister using your VAT account and keep all transactions after filing until HMRC approves your deregistration.
- You are required to file a final VAT return from the date of your most recent VAT period until the date you deregister.
Frequently Asked Questions
How to deal with errors on VAT returns
You can amend any errors on your next VAT return. However, if the total value of your error is more than £10,000 of 1% of your VAT returns, you should report this to HMRC using the error notification form, VAT652
What should I do if I exceeded the VAT threshold in the past 12 months?
If your taxable VAT turnover was more than £85,000, you are required to register within 30 days. The first day of the second month after you exceeded your VAT threshold is the effective registration date. This will prevent you from paying any fines.
Can I claim VAT on purchases from before registration?
You can claim specific items after you register and submit your first return, however, there is a time limit for each item. For example, the Spring 2021 budget will include a finance bill that will enable businesses to be repaid for early trading losses related to Covid-19.
If you exceed the VAT threshold of £85,000, you must notify HMRC immediately. It is preferable to have a VAT number prior to exceeding this threshold to avoid any late fees.
If this is a temporary blip in your sales and turnover, you may ask for an exemption and prove to HMRC that you will not exceed this threshold in the next 12 months.