Changes to VAT Registration and Deregistration Thresholds

The recent increase in VAT registration and deregistration thresholds is a significant  change for many businesses and, in lots of ways, a welcome one.

Implemented on April 1, 2024, this reform simplifies VAT compliance for a significant portion of the market and offers potential financial benefits. 

VAT (Value Added Tax) is a consumption tax levied on the supply of most goods and services. Businesses exceeding a specific annual turnover threshold must register for VAT. This registration compels them to charge VAT on their sales, file VAT returns, and claim input VAT on their purchases.

The registration threshold acts as a benchmark for determining this mandatory registration. Businesses with a taxable turnover below this threshold are generally exempt from registration. Similarly, the deregistration threshold allows VAT-registered businesses to cancel their registration if their turnover falls below a specified level for a sustained period.

Prior to April 1, 2024, the VAT registration threshold stood at £85,000. This meant businesses with a taxable turnover exceeding £85,000 in the previous 12 months had to register for VAT. The deregistration threshold was set at £83,000.

The new regulations have increased both thresholds. The registration threshold is now £90,000, and the deregistration threshold is £88,000. This change offers some breathing room for businesses, potentially exempting them from VAT registration or allowing them to deregister if their turnover dips below the new threshold.

The revised thresholds are estimated to benefit around 28,000 businesses in the first year alone. These businesses will no longer need to grapple with VAT registration and compliance, reducing administrative burdens and associated costs.

Here’s a breakdown of the potential benefits:

• Reduced administrative burden: VAT registration involves additional bookkeeping and tax filing requirements. Deregistering or avoiding registration in the first place frees up valuable time and resources for core business activities.
• Lower compliance costs: Businesses often require professional help to navigate VAT complexities. Deregistration or exemption from registration translates to cost savings on accounting and tax services.
• Improved cash flow: VAT involves collecting VAT on sales and paying it to HMRC. Deregistration eliminates this outgoing cash flow, potentially improving a business’s short-term financial health.

However, it’s important to consider some potential drawbacks:

• Loss of input VAT recovery: Registered businesses can reclaim VAT paid on their purchases. Deregistration eliminates this benefit, potentially increasing overall costs.
• Impact on VAT-registered customers: Businesses supplying goods or services to VAT-registered customers may find deregistration less attractive, as their customers won’t be able to reclaim input VAT on those purchases.

Not all businesses below the new threshold will benefit equally from deregistration. Here are some factors to consider:

• Profit margins: Businesses with low profit margins might find the benefits of deregistration outweigh the loss of input VAT recovery.
• Customer base: Businesses primarily supplying VAT-registered customers may be better off staying registered to maintain their customers’ ability to reclaim input VAT.
• Growth projections: Businesses anticipating significant growth and exceeding the new registration threshold in the near future might be better off staying registered to avoid the hassle of re-registering later.

There’s one wider significant factor. This is, of course, an election year and this move has been carefully timed so that people feel the benefit ahead of visiting the ballot box. An incoming government may see the need to alter the tax burden differently, so keep an eye out for regulatory changes after the June vote.

But, for now, the decision to deregister or remain VAT-registered requires careful consideration of your specific circumstances. Chat with us to get guidance based on your business’s financial situation, customer base, and growth plans.