What is a VAT Threshold?

VAT, or value-added tax, is a turnover tax where the threshold is the amount to which a business is entitled to an inevitable turnover before it can be required to register for the value-added tax and charge it on its products. The VAT is set so that small businesses are not included in its sphere, and fewer problems are connected with administration.

Registering for VAT

After registering, businesses must charge VAT on goods and services they sell or offer and remit the amount to HMRC. There are, of course, several exemptions.

Suppose the total amount of a business’s sale is below the stipulated limit. In that case, a company doesn’t need to register for VAT or even charge it on its sales. However, it can voluntarily register to claim back the VAT it has incurred in buying goods.

Advantages of Staying Below the Threshold

There are several benefits for businesses with turnover under the VAT threshold:

– No VAT returns and records – Does not have to prepare or maintain detailed VAT records or complete the VAT return. This cuts short so much time and use of paper.

– A direct cash flow increase – No need to include VAT in their prices, and then remit the collected amounts to the government. The company keeps a percentage of the total selling price.

– Market access and price points – Products can be offered at cheaper prices without including VAT in the price. This can make small firms more competitive since customers are willing to pay a bit extra for the products, knowing that they will get value for their money.

Disadvantages of Staying Below the Threshold

– VAT reclaims – Inability to make a VAT claim that has been paid to suppliers. This can mean higher costs.

– Few growth opportunities – The expansion might imply crossing this threshold and losing specific VAT preferences. Because of this, some small firms are discouraged from expansion.

VAT Schemes

There are also some VAT schemes aimed at easing administrative burdens for small businesses dealing with VAT:

– The Flat Rate Scheme – It is a simplified way of determining the amount of VAT that should be remitted to the tax authorities. In this method, a fixed percentage is used and not an actual figure computation.

– Cash Accounting Scheme – Any business will only have to pay out Value Added Tax to the authorities once the customer has paid the company. This helps cash flow.

– The Annual Accounting Scheme – This is different from the usual way where four VAT returns are filed in a year, but only one return per year is filed. This eases administration.

Changing the VAT Threshold

There have been definite appeals from some quarters to reduce or even do away with the standard VAT threshold.

Arguments include:

– It could add as much as $2 billion per year to government revenues.

– Would have encouraged small firms to register for VAT earlier, even when it is not compulsory for them to do so.

– Additional paperwork charges may act as a burden to small businesses, affect growth, and might lead to loss of jobs.

Conclusion

The value-added tax threshold defines organizations that need to charge and account for value-added tax. Essentially, the level above or below the threshold has cash flow and administrative and competition implications for companies. However, the global pandemic reduced the financial capacity of states in the public domain and can put more pressure in the future to reduce the thresholds.