I Didn’t Realise I Went Over the VAT Threshold

VAT can be a complex topic for most small business owners, particularly the thorny issue of the VAT threshold. If you have gone over the VAT threshold and only recently realised you did so, you’re in the right place for advice. 

Before we start to explain what happens if you go over it, let’s consider the basics. The current threshold for VAT registration in the UK is £85,000 and the VAT turnover threshold is a rolling 12-month figure.  

As soon as you realise you have gone over the VAT threshold it is important to take appropriate action to comply with the law and regulations, so things don’t get any worse. Please don’t ignore the fact you have exceeded the VAT threshold, as you need to do something about it. 

Here’s a quick and simple answer of what to do if you didn’t realise you went over the VAT threshold.

If you didn’t realise you went over the VAT threshold it is important to register for VAT as soon as possible. Ideally within 30 days of the end of the month in which the threshold was first exceeded. Once registered inform HMRC about any VAT liability incurred before the VAT registration date. You are liable for VAT from the point the threshold was exceeded and could be charged penalties for late registration.

Before worrying about what happens after we have gone over the VAT threshold we will just spend a few moments to establish what the VAT threshold is and the action you need to take if you didn’t realise you went over the VAT threshold.

I didn’t realise I went over the VAT threshold

Once you’ve realised that you have gone over the VAT threshold in the UK, it’s important to take appropriate action to comply with the regulations. Here are a few steps you can take:

1. Register for VAT: If your taxable turnover has exceeded the VAT registration threshold, which is £85,000 (2023), you are required to register for VAT. You should complete the VAT registration process as soon as possible.

2. Inform HM Revenue and Customs (HMRC): Once you have registered for VAT, you should inform HMRC about your VAT liability. This can be done by submitting the necessary documents and forms, such as a VAT registration form.

3. Account for VAT: Once registered, you will need to charge VAT on your taxable supplies and keep appropriate records of your VAT transactions. You should familiarise yourself with the VAT rules and ensure that you are accounting for VAT correctly.

4. Submit VAT Returns: As a VAT-registered business, you will need to submit regular VAT returns to HMRC, usually on a quarterly basis. These returns will outline your VAT liability and any VAT you have claimed on your purchases. Ensure that you submit your returns accurately and within the specified deadlines.

5. Pay VAT due: If your VAT returns indicate that you owe VAT to HMRC, you should make the necessary payments within the designated time frame.

6. Seek professional advice: It’s advisable to consult with a tax professional or an accountant who is well-versed in UK VAT regulations. They can guide you through the process, help you understand your obligations, and assist with VAT compliance.

What happens if I go over the VAT threshold without knowing?

If you exceed the VAT threshold in the UK without realising it and fail to register for VAT, you may face certain consequences. Here’s what could happen:

1. Penalties and fines: HM Revenue and Customs (HMRC) can impose penalties for late registration and failure to register for VAT. The penalties can be based on a percentage of the VAT owed, and they may increase the longer you remain unregistered.

2. Backdated VAT liability: HMRC may require you to account for VAT on your past sales from the point at which you should have registered. This means you would need to calculate and pay the VAT that should have been charged to your customers. HMRC may also charge interest on the late VAT payments.

3. Investigation and scrutiny: HMRC has the authority to investigate businesses suspected of not registering for VAT when required. If they find evidence of non-compliance, they can conduct an investigation, which may involve requesting records, conducting interviews, and potentially imposing additional penalties or fines.

4. Reputational damage: Operating as an unregistered business when you should be registered for VAT can harm your reputation, especially if your customers or suppliers discover the situation. It may erode trust and negatively impact your business relationships.

It’s crucial to rectify the situation promptly by registering for VAT and notifying HMRC about your liability. It’s advisable to seek professional advice from a tax specialist or accountant who can assist you in understanding the implications and guide you through the process of becoming compliant with VAT regulations.

Is it a criminal offence to not register for VAT?

Failure to register for VAT in the UK when you are required to do so is generally not considered a criminal offence. Instead, it is typically treated as a civil matter, and the consequences typically involve financial penalties, interest charges, and potential investigations by HM Revenue and Customs (HMRC).

However, if there is evidence of deliberate and intentional evasion of VAT or fraudulent activities related to VAT, it can be considered a criminal offence. This includes situations where someone intentionally provides false information, manipulates records, or engages in deliberate tax evasion schemes.

In such cases, HMRC can pursue criminal proceedings, which may result in fines, prosecution, and potential imprisonment.

It’s important to note that I am not a legal expert. If you find yourself in a situation where you are unsure about VAT registration or related legal matters, it is advisable to consult with a qualified tax professional or seek legal advice to understand your specific circumstances.

Did you know? Aside from the consequences to breaking the law on VAT, you might also be interested in the pros and cons to becoming VAT registered.

Does the VAT threshold reset?

In the UK, the VAT threshold does not reset automatically. Once your taxable turnover exceeds the VAT registration threshold, you are required to register for VAT and comply with VAT regulations for as long as your business meets the registration criteria.

The VAT registration threshold is typically reviewed annually by the UK government, and any changes to the threshold are announced during the budget or financial updates. However, these changes usually adjust the threshold amount but do not reset it for businesses that have already registered.

It’s important to monitor your taxable turnover regularly to ensure that you remain compliant with VAT obligations. If your turnover falls below the deregistration threshold (£83,000 – 2023), you may be eligible to apply for deregistration and stop charging VAT. However, this is a separate process, and it’s recommended to seek advice from a tax professional or consult HM Revenue and Customs (HMRC) for guidance specific to your situation.

It usually takes 3 weeks for HMRC to confirm your cancellation and the official cancellation date. This is either the date when the reason for your cancellation took effect (for example, when you stopped trading), or the date you asked to cancel.

Do you pay VAT on the first £85,000 when you register for VAT?

In the UK, the VAT registration threshold determines whether a business is required to register for VAT. The VAT registration threshold was £85,000 (2023) in a 12-month period. This means that if your taxable turnover exceeds £85,000 within a 12-month period, you are obligated to register for VAT and charge VAT on your eligible sales.

It’s important to note that the VAT threshold refers to the total taxable turnover, not the first £85,000 specifically. Once you register for VAT, you are required to account for VAT on all eligible sales and charge VAT to your customers accordingly. The current VAT rate in the UK is generally 20%, although certain goods and services may have reduced rates or be exempt from VAT.

It’s worth mentioning that VAT regulations can change over time, and it’s essential to consult the latest guidelines from HM Revenue and Customs (HMRC) or seek professional advice to ensure compliance with current VAT thresholds and rates.

FAQs on not realising you went over the VAT threshold?

What happens if I temporarily went over the VAT threshold?

If your business expects to temporarily exceed the VAT threshold in the UK, there are a few options you can consider:

1. Monitor your turnover: Keep a close eye on your taxable turnover to determine whether it will exceed the VAT threshold over a sustained period. If the temporary increase is due to a specific event or a one-time occurrence, it may not necessitate VAT registration.

2. Voluntarily register for VAT: Even if your business will only temporarily exceed the VAT threshold, you have the option to voluntarily register for VAT. This may be beneficial if you anticipate continued growth beyond the temporary increase or if you want to claim back VAT on business-related expenses.

3. Consider the Annual Accounting Scheme: If you expect to fluctuate around the VAT threshold, you may benefit from the Annual Accounting Scheme offered by HM Revenue and Customs (HMRC). This scheme allows you to submit one annual VAT return instead of quarterly returns, simplifying the administration process.

4. Apply for a temporary exemption: In certain circumstances, HMRC may grant a temporary exemption from VAT registration if you can provide evidence that the increased turnover is due to exceptional circumstances and not a sustained trend. However, these exemptions are granted on a case-by-case basis, and it’s advisable to contact HMRC directly for guidance.

It’s important to consult with a tax professional or seek advice from HMRC to determine the most appropriate course of action based on your specific situation. They can provide personalised guidance on VAT registration and compliance based on the current regulations.

What is the penalty for not being VAT registered?

There is no penalty for not being VAT registered unless you are charging VAT when you should not be, or if you have gone over the threshold. In cases like this, you could be subject to penalties and possible legal action. 

Can I form a second company to avoid the VAT threshold? 

Forming a second company solely for the purpose of avoiding the VAT threshold is not a legitimate strategy and can be considered tax evasion. It is important to understand that tax evasion is illegal and can lead to severe penalties and legal consequences.

HM Revenue and Customs (HMRC) has strict rules and regulations in place to prevent the abuse of multiple companies to avoid VAT obligations. They have measures to identify businesses that attempt to artificially split their activities or turnover between multiple entities to stay below the VAT threshold.

If HMRC determines that a second company has been formed for the purpose of avoiding VAT, they can take actions such as:

1. Deeming the activities of the two companies as connected: HMRC may treat the activities and turnover of the two companies as connected, effectively disregarding the separation. This means that the combined turnover will be considered for VAT registration purposes.

2. Applying penalties and fines: If HMRC finds that you intentionally formed a second company to evade VAT, they can impose penalties, fines, and interest charges on the unpaid VAT. The penalties can be substantial, and criminal prosecution may also be pursued in severe cases.

It’s important to operate your business in compliance with the tax regulations and seek professional advice from a tax specialist or accountant who can guide you on the appropriate and legal ways to manage your VAT obligations.

Can I register for VAT if my turnover is below the threshold?

Yes, you can choose to voluntarily register for VAT is your turnover is below the threshold. By doing so, you could save tax in cases where your customers reclaim VAT themselves.

Conclusion

In conclusion, realising that you have exceeded the VAT threshold in the UK, even if you didn’t initially realise it, can be a stressful situation. However, it’s crucial to take immediate action to rectify the situation and ensure compliance with VAT regulations. We have outlined those above so won’t dwell on it here again.

Remember, ignorance of the VAT threshold does not excuse non-compliance. It’s essential to take responsibility, address the situation proactively, and work towards meeting your VAT obligations. By acting swiftly and seeking expert guidance, you can mitigate potential penalties, safeguard your business reputation, and maintain a smooth operation within the bounds of the law.