What’s changed with the VAT registration limit?

May 24th 2024

Although the Chancellor announced an increase to the VAT registration limit in the Spring Budget 2024, it was fairly modest. As a service business if your turnover exceeds the new limit, can you legitimately avoid having to register?  Associate Jayne Rogerson discusses the implications.

Until 1 April 2024, the VAT registration turnover threshold had been static, and as a result many small businesses have been dragged into the VAT net. The good news is that the threshold was increased in the 2024 Spring Budget. The bad news is the increase only raised it from £85,000 to £90,000.

Once turnover breaches the threshold you must add VAT to your prices. This usually isn’t a problem if your customers are registered, as they can just recover the VAT, but unregistered customers may be put off.

EXAMPLE. Plumber Peter has a thriving business of private and commercial customers. His turnover takes him over the VAT threshold so he must add VAT to his bills. The sudden price rise causes many of his private clients to look for cheaper alternatives.

To prevent his private clients going elsewhere, Peter could manage his sales so that they never breach the threshold by forgoing work, perhaps by taking a holiday, or being picky over which contracts to take on. Naturally, he’s not keen on this as it means his income is reduced. Alternatively, he could initially absorb some of the VAT himself for his existing private customers but slowly increase his prices.

You could choose to delay registration by forming a company and run your business through that. This resets the turnover clock to zero for VAT registration purposes which delays when the threshold is reached.

Another method of avoiding registration is to split the business. This can fall foul of HMRC but it’s possible in the right circumstances. Business splitting is possible because it isn’t businesses that register for VAT but business owners, i.e. individuals, partners and companies. A viable option for some, depending on geography or the markets they serve, will be to separate part of the business into a company, maintaining separate bank accounts and records. Naturally, this involves extra cost, e.g. accountancy fees, but this should be easily outweighed by the VAT advantages.

EXAMPLE. With the help of his accountant, Peter transfers his commercial contracts to Peter Plumbing Ltd. He opens a company bank account, ensures his suppliers invoice the right entity and the company pays rent for the use of his van and tools. He continues as a sole trader to supply his private customers.

However, when splitting a business it is vital to make sure each business is run autonomously and that there’s a commercial reason for the split otherwise HMRC can aggregate the businesses for VAT purposes. However, aggregation can’t be backdated.

You could simply reduce your turnover but doing less work or charging less is unlikely to be an attractive option. Alternatively, delay registration by transferring your trade to a new ownership entity, e.g. sole trader to company. Another option is to split the business if the circumstances are right. It is vital that each business is run autonomously.

But it may prove to be unavoidable to avoid VAT registration in the long term. This is not the end of the world. With reliable accounting and a sound pricing plan, VAT registration should just mean a bit more compliance requiring the completion of regular VAT returns.

If you need advice about VAT and the implications your business, as well as further VAT advice, please do not hesitate to contact the team at JRW Hogg & Thorburn.

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