VAT Registration Freeze

The chancellor’s decision to freeze the VAT registration threshold of £85,000 for two years would have undoubtedly come as a relief for many small businesses.

This means that until 31 March 2020, businesses do not need to register for VAT until their taxable turnover exceeds £85,000 in any rolling 12 month period.

Businesses can de-register from VAT if their taxable turnover falls below the £83,000 threshold.

Prior to the budget there were rumours that the VAT threshold was going to be lowered significantly which would have required many small businesses to start charging VAT on their sales, so this freeze was good news to many small businesses.

MTD for VAT                                                                                                  

An important consideration for the freezing of the VAT threshold is the upcoming introduction of Making Tax Digital (MTD) in April 2019. This new system will apply to businesses above the VAT registration limit of £85,000.

From April 2019 all VAT registered businesses with turnover above the VAT threshold will be required to maintain digital records and will need to send their VAT information to HMRC using third party commercial software. HMRC’s online portal will remain available to all other businesses that complete a VAT return but have turnover below the VAT threshold.

Usually the VAT registration threshold increases inline with inflation each year, with an annual increase of at least £1,000 every year since March 1990, so the freeze may mean that some businesses with a turnover currently below the threshold may well be dragged into the scope of MTD by April 2019, as their turnover may increase whilst the VAT registration limit remains the same.

Review of the VAT registration threshold

The UK VAT threshold of £85,000 is the highest throughout the 35 member countries of the Organisation for Economic Co-operation and Development (OECD), with Germany operating a much lower threshold at €17,500, for example.

A recent repost by the Office of Tax Simplification has shown that our current limit discourages businesses from surpassing the £85,000 in turnover, preventing the potential of maximum growth of some businesses.

However, The Federation of Small Businesses (FSB) have warmly welcomed the Chancellor’s  decision to freeze VAT thresholds for two years, as it means that many small businesses will not face additional administrative burdens at a time when MTD is on the verge of being introduced to digitise the country’s tax system.