VAT registration freeze – the implications


Dec 08, 2017



In his Autumn Budget update on 22 November, the Chancellor Philip Hammond announced that he would be keeping the current VAT registration threshold on hold at £85,000 for the next two tax years.  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.   At the same time, businesses can apply to de-register from VAT if their turnover falls below £83,000.

Usually the VAT registration threshold increases in line with inflation each year, and there has been an annual rise of at least £1,000 every year since March 1990 (when the limit was only £25,400!).  This freeze has come as welcome news to many small businesses, as prior to the budget there were rumours that the VAT registration threshold was going to be lowered significantly.  This would have required many businesses to start charging VAT on their sales.



An important consideration for the freezing of the VAT threshold is the upcoming introduction of Making Tax Digital (MTD) in April 2019.  This new digital tax system will apply to all those businesses above the £85,000 VAT registration limit.  Many businesses with a turnover currently below the VAT threshold may well be dragged into the scope of MTD by April 2019, as their turnover may increase during this period even if the VAT registration limit remains the same.   One consolation may be that businesses will now know for certain the level at which they will first become subject to MTD obligations.


VAT registration threshold under review

During this two year freeze the government plans to start consultations on whether the VAT threshold should in fact be reduced, in order to encourage growth in small businesses.   The UK currently has the highest VAT registration threshold in Europe, and a recent report by the Office for Tax Simplification (OTS) has shown that our current limit discourages businesses from surpassing £85,000 in turnover.

The OTS report says: “At £85,000, the UK has the highest VAT threshold in the EU, where the average is £20,000, and the highest general threshold in the OECD. The data and anecdotal evidence considered in this review clearly shows that the threshold distorts behaviour by creating a significant cliff-edge, resulting in a bunching effect just below the £85,000 turnover level, rather than the smoother pattern one would otherwise expect. The threshold is therefore presenting a significant disincentive to maximising the potential growth of some businesses.”

As our VAT system is mainly managed by EU rules, there are unlikely to be any significant changes to VAT until Britain leaves the EU in March 2019.  The VAT threshold for relevant acquisitions from other EU member states is also remaining at £85,000, as long as the UK remains a member of the EU.

VAT is the third largest source of tax revenue collected by HMRC, after Income Tax and National Insurance Contributions. £120bn of VAT was collected in 2016/17, which was 22.5% of all taxes.

If you have any questions about VAT registration thresholds or registering your business for VAT then please get in touch and we’ll be happy to help.