Skip to content 
Value Added Tax (VAT) is an important source of revenue for the UK government, bringing in over £125 billion annually. All businesses in the UK trading above the set VAT registration thresholds are legally required to register, charge, collect and pay over VAT to HMRC. Our Tax Experts cover the key aspects of VAT compliance that small businesses need to be aware of.
Current VAT Registration Thresholds
The VAT registration threshold determines which businesses must register for VAT based on their turnover levels. The current VAT thresholds are:
- Standard VAT registration threshold – £85,000
- VAT registration threshold for distance sales to UK buyers – £70,000 (Old Rule)
- VAT registration threshold for businesses selling certain goods – £83,000 (Old Rule)
These turnover thresholds apply even if the business is not profit-making. Voluntary registration is also possible for UK businesses trading below the thresholds.
Key VAT Obligations The main legal obligations for small businesses once registered include:
- Charging VAT at 20% on taxable goods and services
- Submitting regular VAT returns and paying VAT liabilities
- Keeping sufficient business records to support VAT return figures
- Issuing VAT invoices for all taxable supplies
- Notifying HMRC of any changes in circumstances that affect VAT
VAT Reporting Deadlines
VAT reporting periods depend on the size of taxable turnover:
- Up to £150,000 – Submit VAT returns quarterly
- £150,000 to £1.35 million – Submit VAT returns monthly
- Over £1.35 million – Submit VAT returns monthly and make interim VAT payments
Newly registered businesses also have special temporary reporting deadlines.
HMRC VAT Registration Powers
HMRC has the power to compulsorily register businesses to ensure that all VAT-liable businesses are registered. Situations, where HMRC can register a business without consent, include:
- The business has breached the VAT registration threshold
- There is evidence that the business is already trading over the threshold
- The business has failed to respond to previous HMRC requests to register
- VAT fraud is suspected
This prevents loss of VAT revenues, so businesses should voluntarily register on time.
VAT Penalties and Investigations
Penalties apply for breaches of VAT rules and obligations. HMRC actively investigates businesses suspected of VAT fraud using information from banks, suppliers, public complaints and other sources. There are new set of penlaties introduced by HMRC since this article was published. Please refer to HMRC webiste.
Common small business VAT penalties include:
- Late VAT registration after breaching the thresholds – up to £100 civil penalty
- Late filing of VAT returns – £200 initial fine, further 10% of VAT owed for over three months
- Inaccurate VAT return leading to underpaid VAT – up to 30% of the shortfall
- VAT fraud – stronger criminal penalties
Signs that a small business may be facing an HMRC VAT investigation include:
- An information request or scheduled audit meeting with detailed VAT questions
- VAT officer visits business premises to inspect records
- VAT penalty notices received
A VAT investigation can be extremely costly, even if the result shows the business had not deliberately committed fraud. Seeking immediate professional tax advice is recommended if warning signs of an investigation appear. Maintaining proper VAT records, registering on time, submitting accurate returns, notifying changes and keeping tax knowledge up to date are the best ways for small businesses to remain compliant and avoid VAT penalties.
If you need help with VAT Tax Planning or VAT Compliance; we have tax experts who can help you. Call our office to discuss your circumstances.