The VAT Threshold For Small Trades Businesses

If you're thriving in the world of running your own trade business, there's one thing you can't afford to overlook - VAT. Yep, that three-letter acronym that can sometimes feel like a bit of a headache. But fear not! In this blog post, we're going to break down everything you need to know about VAT, its newly affected threshold and what it means for your business. So, grab a cuppa, settle in, and let's dive into the world of VAT!

What is VAT?

VAT, or Value Added Tax, is that little tax you have to deal with when you're selling or buying stuff. Basically, every time you make a sale (a product or your service), you add a bit of VAT onto the price (providing your business turns over £90k or more a year). Likewise, when you're buying stuff for your business, you pay VAT on those purchases, too. But here's the thing - you only hand over the difference between what you've collected and what you've paid out. It's like a mini tax game where you're the middleman, collecting VAT from your customers and passing it on to the taxman.

What is the VAT Threshold?

Okay, let's start with the basics. The VAT threshold is essentially the point at which you become liable to register for VAT with HM Revenue & Customs (HMRC). Think of it as a milestone that determines whether you need to start charging VAT on your goods and services. With the latest Spring Budget from the UK government, the VAT threshold was raised to £90,000 (from 1st April 2024 - previously, it was £85,000), meaning if your trade business turns over this amount every 12 months, you must register for VAT. 

Crunching Your Numbers: Working Out Taxable Turnover

Now, we know what you're thinking - "How do I even know if I've hit that threshold?" Well, it all boils down to your taxable turnover. This is the total value of everything you sell that isn't exempt from VAT - as mentioned above £85,000 for 2023 rising to £90,000 for 2024. There's no need to worry though, you don't need to be a maths genius to figure out how to calculate yours!

To work out your taxable turnover, simply add up the value of all your sales that aren't VAT-exempt over the past 12 months. This includes both your goods and services. If that total exceeds the current VAT threshold, congratulations - you're officially in VAT territory!

Can a Sole Trader Be VAT Registered?

Now, you might be wondering, "But hang on a minute, I'm just a one-person show. Can I even register for VAT?" Absolutely! Whether you're a sole trader, a partnership, or a limited company, if your taxable turnover meets or exceeds the VAT threshold, you're eligible to register for VAT.

How to Register for VAT

So, you've hit the threshold – what's next? Time to roll up those sleeves and get yourself registered for VAT. But don't worry, it's not as daunting as it sounds. HMRC has made the process fairly straightforward.

You can register for VAT online through the Government Gateway or by filling out a paper form. Once you're registered, HMRC will send you a VAT registration certificate, which includes your unique VAT registration number and the date your registration takes effect. Hold onto this certificate - you'll need it for all your VAT-related dealings.

Charging and Paying VAT

Alright, let's talk about the nitty-gritty - charging and paying VAT. As a VAT-registered trade business, you'll need to charge VAT on most of your sales/ services provided. The standard rate of VAT in the UK is currently 20%, but there are also reduced rates and exemptions for certain goods and services.

When you invoice your customers, make sure to clearly state the amount of VAT being charged. This helps them understand the breakdown of their total bill. And remember, it's not just about charging VAT - you'll also be able to reclaim VAT on any eligible purchases you make for your business. It's like a little tax refund in your pocket!

What Is a VAT Certificate?

Ah, what exactly is the elusive VAT certificate? Well, think of it as your business's official stamp of approval from HMRC. It proves that you're a bona fide VAT-registered trade business and includes all the important details, like your VAT registration number and effective date.

You'll need to keep your VAT certificate handy for various purposes, from dealing with suppliers to applying for VAT refunds on business expenses. So, tuck it away in a safe place - you never know when you might need to whip it out.

What Happens If You Don't Register for VAT?

Now, here's the million-pound question: what happens if you don't register for VAT when you should? Well, ignorance is not bliss when it comes to tax matters. If HMRC catches wind of your non-compliance, they won't be too pleased.

Ignoring the VAT threshold and failing to register can result in some pretty hefty penalties, not to mention the hassle of having to sort out your VAT affairs retroactively. Trust us, it's not a headache you want to deal with!

And That's All For Your VAT, Folks

And there you have it - everything you need to know about the VAT threshold and how it affects your trade business. While navigating the world of VAT can feel a bit overwhelming at times, with a little know-how and some careful record-keeping, you'll be a VAT pro in no time!

So, keep those invoices in order, stay on top of your VAT returns, and don't forget to proudly display that VAT registration number on all your official documents. After all, you're a legitimate VAT-registered tradesperson now – own it! And finally, for all your trade insurance matters, the team at Rhino Trade Insurance are here to help. From super prices for your public liability to tailored cover for your plumbing venture, we have the lot. Call our brokers on 0116 243 7904 or visit us online.