What is Turnover?

Turnover is the total income a business earns from its ordinary activities during an accounting period, net of VAT and other sales taxes, trade discounts, and returns. In UK accounting terminology, turnover is broadly equivalent to revenue or sales, and it appears as the top line of the income statement (profit and loss account).

The Companies Act 2006 defines turnover in section 474 as the amounts derived from the provision of goods and services falling within the company’s ordinary activities, after deduction of trade discounts, VAT, and any other taxes based directly on the amounts so derived.

What Counts as Turnover

Turnover includes income from the company’s principal activities. It excludes exceptional or incidental income:

The distinction matters because turnover determines the company’s size classification for Companies House filing purposes and its VAT registration obligations.

Revenue Recognition Under FRS 102

FRS 102 (Section 23) sets out the rules for when turnover should be recognised in the financial statements.

Sale of Goods

Revenue from the sale of goods is recognised when all of the following conditions are met:

1. The significant risks and rewards of ownership have been transferred to the buyer
2. The seller retains neither continuing managerial involvement nor effective control over the goods
3. The amount of revenue can be measured reliably
4. It is probable that the economic benefits will flow to the entity
5. The costs incurred or to be incurred can be measured reliably

Rendering of Services

Revenue from services is recognised by reference to the stage of completion of the transaction at the reporting date, provided the outcome can be estimated reliably.

Construction Contracts

For long-term construction contracts, revenue and costs are recognised by reference to the stage of completion (percentage of completion method).

Recording Turnover: Journal Entries

Cash Sale

A retail business sells goods for £500 plus 20% VAT:

Credit Sale

A wholesaler sells goods for £8,000 plus VAT on 30-day terms:

For a detailed guide to these entries, see the article on journal entries .

Turnover and VAT

Turnover is always stated net of VAT. The VAT charged to customers is not income of the business; it is collected on behalf of HMRC.

VAT Registration Threshold

A business must register for VAT if its taxable turnover exceeds £90,000 (2024/25 threshold) in any rolling 12-month period, or if it expects to exceed the threshold within the next 30 days alone.

VAT Rates

Exempt turnover is not included in taxable turnover for VAT threshold purposes but does count as total turnover for Companies Act purposes.

Turnover on the Income Statement

Turnover is the starting point of the income statement:

The relationship between turnover and cost of sales determines the gross profit margin , one of the most important indicators of a business’s trading performance.

Key Ratios Involving Turnover

Gross Profit Margin

Gross Profit Margin = (Turnover - Cost of Sales) / Turnover x 100

Net Profit Margin

Net Profit Margin = Net Profit / Turnover x 100

Revenue Per Employee

Revenue Per Employee = Turnover / Average Number of Employees

This measures productivity and is useful for comparing businesses within the same industry.

Asset Turnover

Asset Turnover = Turnover / Total Assets

This measures how efficiently the company uses its assets to generate revenue. A higher ratio indicates more productive use of assets.

Debtor Days

Debtor Days = (Accounts Receivable / Turnover) x 365

Strictly, this should use credit sales rather than total turnover, but turnover is often used as a proxy where credit sales are not separately disclosed.

Turnover and Company Size Thresholds

Turnover is one of the three criteria used to determine a company’s size classification under the Companies Act 2006:

A company qualifies for a size category if it meets two of the three criteria in two consecutive years. Size classification affects filing obligations, audit requirements, and disclosure levels.

Audit Exemption

Small companies with turnover below £10.2 million and meeting the other size criteria are generally exempt from statutory audit, reducing compliance costs significantly.

Turnover and Corporation Tax

For corporation tax purposes, turnover forms the basis of the company’s trading income. The tax computation starts with the accounting profit (which is driven by turnover) and makes adjustments for items that are treated differently for tax purposes.

Key turnover-related tax points:

• Turnover must be reported on the CT600 corporation tax return
• The small profits rate of 19% applies to companies with taxable profits up to £50,000 (marginal relief applies between £50,000 and £250,000)
• The main rate is 25% for profits above £250,000
• HMRC may challenge turnover figures if they appear inconsistent with industry norms or the company’s history

Turnover and HMRC Reporting

Making Tax Digital

Under Making Tax Digital (MTD), VAT-registered businesses must maintain digital records of their sales (turnover) and submit VAT returns directly from compatible software. MTD for Income Tax Self Assessment (ITSA) is being rolled out for sole traders and landlords with turnover above £50,000.

Annual Accounts and Tax Returns

Turnover must be consistently reported across:

• Statutory accounts filed at Companies House
• The CT600 corporation tax return
• VAT returns (the Box 6 total of sales excluding VAT should broadly agree with reported turnover)

Significant discrepancies between these sources can trigger an HMRC enquiry.

Turnover Growth and Analysis

Year-on-Year Growth

Turnover Growth = (Current Year Turnover - Prior Year Turnover) / Prior Year Turnover x 100

Consistent turnover growth indicates a healthy, expanding business. However, growth must be assessed alongside:

• Profitability: Growing turnover with declining margins may indicate pricing pressure or rising costs
• Cash collection: Growing turnover with rising accounts receivable may signal collection problems
• Customer concentration: Growth driven by a single customer creates dependency risk

Segmental Analysis

For larger companies, analysing turnover by segment provides insight into which parts of the business are driving growth:

Turnover Versus Revenue Versus Sales

These terms are often used interchangeably, but there are subtle differences in UK practice:

For statutory accounts filed at Companies House, turnover is the correct heading under the Companies Act formats, though FRS 102 uses revenue in its guidance. Both are acceptable in practice.

Common Turnover Adjustments

Returns and Refunds

Goods returned by customers must be deducted from turnover. The journal entry reverses the original sale:

Trade Discounts

Trade discounts granted to customers are deducted from the invoice price, so they reduce turnover at the point of sale. Settlement discounts for early payment are treated as a finance cost under FRS 102, not as a reduction in turnover.

Deferred Income

When cash is received before the service is delivered, the amount is recorded as deferred income (a current liability ) and released to turnover as the service is performed.