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:
| Included in Turnover | Not Included in Turnover |
|---|---|
| Sales of goods | Interest received |
| Fees for services rendered | Rental income (unless the company’s trade is property letting) |
| Commission income (if the company’s trade) | Profit on disposal of fixed assets |
| Subscription income | Government grants |
| Licence and royalty income (if the company’s trade) | Foreign exchange gains |
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:
- The significant risks and rewards of ownership have been transferred to the buyer
- The seller retains neither continuing managerial involvement nor effective control over the goods
- The amount of revenue can be measured reliably
- It is probable that the economic benefits will flow to the entity
- 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:
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Cash / Bank | 600 | |
| Sales revenue (turnover) | 500 | |
| VAT output tax | 100 |
Credit Sale
A wholesaler sells goods for £8,000 plus VAT on 30-day terms:
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Accounts receivable | 9,600 | |
| Sales revenue (turnover) | 8,000 | |
| VAT output tax | 1,600 |
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 the current £90,000 threshold in any rolling 12-month period, or if it expects to exceed the threshold within the next 30 days alone.
VAT Rates
| Rate | Percentage | Examples |
|---|---|---|
| Standard rate | 20% | Most goods and services |
| Reduced rate | 5% | Domestic fuel and power, children’s car seats |
| Zero rate | 0% | Most food, children’s clothing, books, newspapers |
| Exempt | N/A | Financial services, insurance, education, health |
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:
| Income Statement | £ |
|---|---|
| Turnover | 500,000 |
| Cost of sales | (200,000) |
| Gross profit | 300,000 |
| Administrative expenses | (180,000) |
| Operating profit | 120,000 |
| Interest payable | (5,000) |
| Profit before taxation | 115,000 |
| Corporation tax | (28,750) |
| Profit after taxation | 86,250 |
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
| Scenario | Turnover (£) | Cost of Sales (£) | Gross Margin |
|---|---|---|---|
| High margin | 500,000 | 150,000 | 70% |
| Low margin | 500,000 | 350,000 | 30% |
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. The thresholds for financial years beginning on or after 6 April 2025 are:
| Size | Turnover | Balance Sheet Total | Employees |
|---|---|---|---|
| Micro | Up to £1 million | Up to £500,000 | Up to 10 |
| Small | Up to £15 million | Up to £7.5 million | Up to 50 |
| Medium | Up to £54 million | Up to £27 million | Up to 250 |
| Large | Above medium thresholds | Above medium thresholds | Above 250 |
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 up to £15 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:
| Segment | Current Year (£) | Prior Year (£) | Growth |
|---|---|---|---|
| UK sales | 350,000 | 320,000 | 9.4% |
| Export sales | 120,000 | 95,000 | 26.3% |
| Service income | 30,000 | 25,000 | 20.0% |
| Total turnover | 500,000 | 440,000 | 13.6% |
Turnover Versus Revenue Versus Sales
These terms are often used interchangeably, but there are subtle differences in UK practice:
| Term | UK Usage |
|---|---|
| Turnover | The Companies Act term; the statutory income statement heading |
| Revenue | The IFRS and FRS 102 term; increasingly used in practice |
| Sales | Informal term; commonly used in management accounts |
| Income | Broader term that may include non-trading items |
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:
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Sales returns | 500 | |
| VAT output tax | 100 | |
| Accounts receivable | 600 |
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.