Crossing the VAT threshold without a nasty surprise

How the threshold actually works

The test is a rolling twelve months, not your tax year or your accounting year. At the end of every month, you add up the last twelve months of taxable turnover. If that figure goes over $90,000, you have thirty days to register, and you start charging from the first day of the month after that.

There is a second trigger people forget. If you expect to go over $90,000 in the next thirty days alone, perhaps because a single large contract has landed, you register immediately and charge from that day. One invoice can do it.

The month it catches people

Almost nobody misses the threshold by miles. They miss it by a few thousand; in a month they were not paying attention, and find out at year-end when it is six months too late. By then, the tax is still owed on everything invoiced since the registration date, whether or not you charged it.

• A good quarter pushes the rolling total up faster than the calendar year suggests

• One off projects count, even if they will not repeat

• Recharged expenses usually count as part of your turnover

“The registration itself takes twenty minutes. Deciding whether your prices go up by twenty percent takes longer.”

What to tell your clients

If your clients are VAT-registered businesses, this is a non-event. They reclaim what you charge, and nothing changes for either of you. If your clients are consumers, or small businesses that are not registered, your price has effectively gone up by a fifth unless you absorb it.

Decide which before you send the first new invoice, tell people in one short email, and give them a date. Nobody minds the change. They mind finding it on an invoice with no warning.

One paragraph, sent two weeks ahead, prevents most of the awkward calls.

Choosing a scheme

Standard accounting is the default and suits most businesses with real costs to reclaim. The flat rate scheme charges a fixed percentage of gross turnover and gives up most reclaims, which can work out better if you buy very little. Cash accounting means you pay VAT when clients pay you, which matters if you are often waiting sixty days to be paid.

There is no universal answer. We run the numbers both ways on your last twelve months and pick whichever leaves you better off, then review it once a year.

Getting the timing right

If you are within about $20,000 of the threshold, start checking the rolling total monthly rather than annually. That is the whole trick. Everything painful about VAT registration comes from finding out late, not from the tax itself.

Our clients do not have to watch it. It is in the monthly report, and we flag it roughly two months before it becomes a problem.