Should I register for VAT?

vat

Business owners ask us Accountants a lot of questions about VAT; here are some of the common ones and some general guidance.

Value Added Tax (VAT) is a tax imposed by the UK government on the sale of goods and services. If your business has a turnover of more than £85,000 in a 12-month period, it is mandatory to register for VAT. If you don’t, you could face severe penalties and fines. Registering for VAT could be essential for your business.

HMRC guidance is available on registering for VAT and How VAT works.

What are the reasons to Register for VAT?

  1. Legal Obligation: As mentioned earlier, if your business has a turnover of more than £85,000 in a 12-month period, you must register for VAT. Failure to do so can result in penalties and fines.
  2. Increased Credibility: Registering for VAT demonstrates to customers and suppliers that your business is legitimate and professional.
  3. Ability to Claim VAT Back: If your business is registered for VAT, you can claim back VAT paid on any goods or services purchased for the business. This can result in a significant savings.

What are the consequences of Non-Registration?

  1. Penalties and Fines: If your business is required to register for VAT but fails to do so, you could face severe penalties and fines, as well as having to pay all the VAT you should have paid to HMRC. The amount of the fine will depend on the level of turnover and the length of time that your business has been operating without registering for VAT.
  2. Loss of Ability to Claim VAT Back: If your business is not registered for VAT, you will not be able to claim back VAT paid on any goods or services purchased for the business. This can result in a significant increase in the cost of running your business.
  3. Reputation Damage: Failure to register for VAT when required can damage your business’s reputation. Customers and suppliers may question the legitimacy of your business, and this could impact your ability to attract and retain customers.

Registering for VAT is essential for businesses in the UK that have a turnover of more than £85,000 in a 12-month period. Failure to do so can result in penalties and fines, loss of ability to claim VAT back, and damage to your business’s reputation. It’s essential to register for VAT as soon as possible to avoid these consequences and ensure that your business is operating legally and professionally.

Why would you register for VAT if you don’t need to?

Voluntary Registration for VAT is possible: even if your business’s turnover is below the £85,000 threshold, you may still choose to register for VAT voluntarily. This may be beneficial if your business regularly makes purchases from VAT-registered suppliers, as you can claim back the VAT paid. It can also increase your credibility as a VAT-registered business.

Even if your business is not legally required to register for VAT, you may choose to do so voluntarily to claim back VAT on purchases and increase credibility.

Are there benefits to being VAT registered?

Yes, there are several benefits to being VAT registered:

  1. Ability to Claim VAT Back: As a VAT-registered business, you can claim back VAT paid on goods and services purchased for the business. This can result in a significant saving for your business.
  2. Increased Credibility: Registering for VAT demonstrates to customers and suppliers that your business is legitimate and professional.
  3. VAT schemes: A VAT-registered business can choose between the standard VAT rate and other VAT schemes, such as the Flat Rate VAT scheme, which can result in a lower VAT bill for the business.

Being VAT registered offers several benefits, including the ability to claim VAT back, increased credibility, and a range of VAT schemes.

What are the downsides of VAT registration?

While being VAT registered has several benefits, there are also some downsides to consider:

  1. Increased Administrative Burden: VAT registered businesses must keep detailed records of all VAT invoices received and issued, and file regular VAT returns. This can be time-consuming and increase the administrative burden on the business.
  2. Cost of Compliance: The cost of complying with VAT regulations, the additional bookkeeping burden, and the risk of HMRC inspection or enquiry.
  3. Increased Prices for Customers: As a VAT-registered business, you must charge VAT on your sales. This can increase the prices for your customers, potentially making your goods or services less competitive in the market. VAT-regsitered customers should be unaffected, as they can reclaim any VAT you charge them.
  4. Reduced Profit Margins: If you are unable to increase your VAT-inclusive prices, the cost of VAT can reduce the profit margins of your business.

While being VAT registered can have several benefits, there are also some downsides to consider, such as increased administrative burden, cost of compliance, increased prices for customers, and reduced profit margins. Before deciding to register for VAT, it’s important to weigh the potential benefits against the downsides to determine if it’s the right decision for your business. Please take advice.

Should you register for VAT?

Whether a business should register for VAT depends on several factors, including its turnover and the type of goods or services it provides. Here are some general guidelines to help determine if VAT registration is necessary:

  1. Turnover Threshold: If your business’s turnover exceeds £85,000, you are legally required to register for VAT.
  2. Voluntary Registration: Even if your business’s turnover is below the £85,000 threshold, you may still choose to register for VAT voluntarily if you feel it will benefit your business.
  3. Type of Goods or Services: If your business provides goods or services that are outside the scope of VAT or exempt from VAT, you may not need to register for VAT.

Whether a business should register for VAT depends on several factors, including its turnover, the type of goods or services it provides, and the potential benefits and downsides of VAT registration.

Can I register for VAT if my turnover is below the threshold?

Yes, you can register for VAT even if your business’s turnover is below the threshold. This is known as voluntary registration.

Even if your business is not legally required to register for VAT, you may choose to do so voluntarily if you feel it will benefit your business. For example, if your business regularly makes purchases from VAT-registered suppliers, you can claim back the VAT paid, which can result in a significant saving for your business.

Do you pay vat on profit or turnover?

In the UK, VAT is charged on the value of taxable supplies, which is the total value of goods or services supplied by a business, excluding any VAT. This is commonly referred to as the “turnover” of a business.

When a VAT-registered business makes a taxable supply, it must charge VAT at the applicable rate (e.g. standard rate, reduced rate, zero rate) on the total value of the supply. The VAT charged must then be reported on the business’s VAT return and paid to HM Revenue and Customs (HMRC) on a regular basis, typically quarterly.

What is profit?

Profit is the excess of revenue over expenses. In other words, it’s the money a business earns after subtracting all of its costs, including the cost of goods sold, operating expenses, and taxes.

Profit is a key measure of a business’s financial performance, as it indicates whether the business is generating enough revenue to cover its costs and generate a return for its owners. Profit can be used to reinvest in the business, pay dividends to shareholders, or cover other expenses.

What is turnover?

Turnover refers to the total amount of money a business generates from the sale of goods or services over a given period of time, typically a year or a quarter. It is a key metric that measures a business’s revenue and is used to assess its financial performance.

Turnover is different from profit, which is the excess of revenue over expenses. While turnover measures the total amount of money generated by a business, profit takes into account all of the business’s costs and expenses to determine the amount of money that is left over as profit.

Does all turnover count towards the VAT registration threshold?

For Value Added Tax (VAT) registration purposes, turnover refers to the total amount of taxable supplies made by a business. What constitutes a taxable supply generally includes the sale of goods and services to customers within the UK and the importation of goods into the UK. If a business’s turnover exceeds the registration threshold, it is required to register for VAT and charge VAT on its taxable supplies.

Any income that a business receives that is not counted as ‘taxable turnover’ is excluded when calculating the VAT registration threshold.

This causes small businesses a surprising number of problems as they are often unsure about what to include and what to leave out.

What are taxable supplies?

Taxable supplies exclude any exempt or outside the scope supplies, and includes the following supplies:

  • standard-rated;
  • reduced rate (5%); or
  • zero-rated

What is not included?

For the purposes of deciding whether a business needs to register for VAT, you can ignore the following:

Income that is exempt from VAT

Including:

  • financial services or insurance;
  • income from property rental or selling land or existing buildings; and
  • gambling

Income that is outside the scope of VAT

Under the place of supply rules, some supplies of goods or services are outside the scope of UK VAT, for example, buying goods in Australia and sending them directly to a customer in Dubai. If the place of supply is outside the UK then that sale does not count for VAT registration purposes.

EU customers

Supplies of services to business customers in an EU member state are outside the scope of UK VAT, e.g., supplying design services to a business customer in Germany.

Customers outside the EU

Supplies of services to any customers outside the UK and EU are outside the scope of UK VAT.

Non-business income

This is also excluded, for example, grant income.

One-off asset disposals

If a businesses sells capital assets as a one-off, for example, some machinery, this sale can be excluded from the calculations.

When must you register?

You must monitor your turnover in the first year of trading and then on a rolling 12-month basis. At the end of every month you must check your turnover from the business start date to the end of that month, until you have been in business for year. Then you must check your turnover for the preceding 12 months at the end of every month. This test is not just performed for certain periods, for example, the tax year or the accounting year.

When you exceed the registration limit you have 30 days to inform HMRC and register for VAT from the first day of the following month.

For example, a business exceeded the VAT registration threshold in August 2022. They had until 30th September to inform HMRC and would be registered for VAT from 1st October 2022.

There are penalties for late registration of up to 15% of the tax due. The rate of penalty increases the longer the delay in registering.

VAT registration when taking over an existing business

When an existing business is taken over, the VAT registration status of the business may change. The VAT registration of the business depends on various factors such as the size of the business, the type of supplies made, and the place of supply of those supplies.

If the new owner of the business continues to make taxable supplies, they may need to register for VAT. In this case, the new owner must inform HM Revenue and Customs (HMRC) about the change of ownership and take over the VAT registration of the previous owner. If the previous owner was VAT registered, the new owner will inherit the same VAT registration number.

If the business being taken over is not registered for VAT, the new owner may need to register for VAT if their taxable turnover (including that of the previous owner) exceeds the VAT registration threshold (currently £85,000 in the UK). In this case, the new owner must apply for VAT registration and inform HMRC about the change of ownership.

Selling and buying a business and VAT

Transfer of a Going Concern (TOGC)

A TOGC is the transfer of a business or part of a business as a whole and is considered to be a single taxable supply for VAT purposes. In a TOGC, the transferor is required to continue to fulfil all the obligations related to the business and the transferee becomes responsible for the same obligations. The transfer of the business is considered to take place as a going concern if the conditions set out in the VAT legislation are met.

For VAT purposes, a TOGC is treated as a single supply of goods and services, and the VAT treatment depends on whether the transferor and transferee are registered for VAT or not. If both parties are registered, the supply is treated as a taxable supply and VAT is chargeable on the sale price of the business. If one or both parties are not registered for VAT, the supply may be exempt or outside the scope of VAT.

What VAT Schemes are available?

In the UK, there are several VAT schemes available to businesses, including:

  1. Standard VAT Scheme: This is the standard VAT accounting method under which businesses must register for VAT once their taxable turnover exceeds the VAT registration threshold, and they must charge VAT on their sales and reclaim VAT on their purchases.
  2. Flat Rate Scheme: This is a simplified VAT accounting scheme designed for small businesses in the UK, under which businesses pay a flat rate percentage of their total turnover to HM Revenue and Customs (HMRC) instead of calculating and paying VAT on each individual sale.
  3. Annual Accounting Scheme: This scheme is designed for businesses that have a stable VAT liability and want to reduce their administrative burden. Under this scheme, businesses make payments based on their estimated VAT liability for the year, rather than on each individual sale.
  4. Cash Accounting Scheme: This scheme is designed for businesses that have difficulty paying VAT on their sales before they have received payment from their customers. Under this scheme, VAT is only payable when payment is received, rather than when the sale is made.
  5. Retail Schemes: These are special VAT schemes designed for businesses that make retail sales, including the Retail Schemes, the Tour Operators Margin Scheme and the Second-hand Margin Scheme.

It is important to note that not all businesses will be eligible for all VAT schemes, and businesses must choose the scheme that best suits their business needs and circumstances.

What is the VAT Flat Rate scheme?

The VAT Flat Rate Scheme is a simplified VAT accounting scheme designed for small businesses in the UK. Under this scheme, instead of calculating and paying VAT on each individual sale, businesses pay a flat rate percentage of their total turnover to HM Revenue and Customs (HMRC).

The flat rate percentage depends on the type of business and is set by HMRC, but is typically lower than the standard VAT rate. This means that businesses may pay less VAT overall, but they also cannot reclaim VAT on their purchases.

To be eligible for the VAT Flat Rate Scheme, businesses must have an annual turnover of no more than £150,000 (as of 2021) and must not be classed as a limited cost trader.

Advantages of the VAT Flat Rate Scheme include simplified VAT accounting and reduced administrative burden, as well as potentially lower VAT costs for businesses. However, it is important to note that businesses may pay more VAT under the scheme if their expenses are higher than the average for their industry.

What is a limited cost trader?

A limited cost trader is a business classification under UK VAT regulations that determines if a business is eligible to use the VAT Flat Rate Scheme.

A limited cost trader is defined as a business where the VAT inclusive expenditure on goods (excluding capital assets and vehicles) is less than 2% of their VAT inclusive turnover in a prescribed accounting period or less than £1,000 per annum (whichever is higher).

Businesses classified as limited cost traders are not eligible to use the VAT Flat Rate Scheme as they are considered to have low costs relative to their sales and thus may benefit more from the standard VAT accounting method.

What is the VAT Annual Accounting Scheme?

The VAT Annual Accounting Scheme is a scheme available to UK businesses that allows them to simplify their VAT administration by making fewer VAT returns throughout the year. Instead of making quarterly VAT returns, businesses under the scheme make nine payments throughout the year, with a final adjustment made in the tenth VAT return.

To be eligible for the VAT Annual Accounting Scheme, a business must meet certain criteria, including having a taxable turnover of less than £1.35 million (as of 2021). Once a business is registered for the scheme, they must remain in it for a minimum of 12 months.

Under the scheme, businesses can pay their VAT in instalments, which can help with cash flow. However, it is important to note that businesses must still ensure they have sufficient funds available to pay their VAT bill in full by the due date.

What is the VAT Cash Accounting Scheme?

The VAT Cash Accounting Scheme is a scheme available to UK businesses that allows them to account for VAT on the basis of payments received and made, rather than invoiced sales and purchases. This scheme can help simplify the VAT administration process for businesses and improve their cash flow.

Under this scheme, VAT is only due on sales when payment is received from the customer, and VAT can only be claimed on purchases when payment is made to the supplier. This means that businesses do not need to pay VAT on sales invoiced but not yet paid, or claim VAT on purchases invoiced but not yet paid.

To be eligible for the VAT Cash Accounting Scheme, a business must meet certain criteria, including having a taxable turnover of less than £1.35 million (as of 2021). Once a business is registered for the scheme, they must remain in it for a minimum of 12 months.

How do I register for VAT?

To register for VAT in the UK, follow these steps:

  1. Determine if you are required to register for VAT: You are required to register for VAT if your taxable turnover (the value of goods and services supplied) exceeds the VAT registration threshold (£85,000 as of 2021).
  2. Choose a VAT scheme: Choose a VAT scheme that best suits your business needs and circumstances, if you are eligible for more than one scheme.
  3. Obtain a VAT registration number: To register for VAT, you must apply to HM Revenue and Customs (HMRC) either online or by post. You will need to provide basic information about your business and the VAT scheme you have chosen.
  4. Start charging VAT on your sales: Once you have registered for VAT, you must start charging VAT on your sales, and reclaiming VAT on your purchases. You will also need to keep records of your sales and purchases and file regular VAT returns.
  5. Pay the VAT you owe to HMRC: Once you have registered for VAT, you will be required to pay the VAT you owe to HMRC either monthly or quarterly, depending on your chosen VAT scheme.

Why is my VAT registration taking so long?

There are several reasons why your VAT registration may be taking longer than expected:

  1. Processing time at HM Revenue and Customs (HMRC): HMRC processes thousands of VAT registrations every day and there may be a backlog of applications.
  2. Incomplete or incorrect information: If the information provided on your VAT registration application is incomplete or incorrect, it will take longer for HMRC to process your application.
  3. Inconsistencies in your business information: If there are inconsistencies in the information provided on your VAT registration application, such as conflicting addresses or names, HMRC may need to carry out additional checks.
  4. Technical issues: HMRC’s online systems may experience technical issues, which can delay processing times.
  5. Compliance checks: HMRC may carry out compliance checks on your business to ensure that it is eligible for VAT registration. This process can take longer if there are any concerns about the business or if additional information is needed.

It is advisable to contact HMRC if your VAT registration is taking longer than expected to find out the reason for the delay and what steps you can take to resolve the issue.

How do I cancel my VAT Registration?

To cancel your VAT registration in the UK, follow these steps:

  1. Check if you are eligible to cancel your VAT registration: You may cancel your VAT registration if your taxable turnover (the value of goods and services supplied) is below the VAT de-registration threshold (£83,000 as of 2021).
  2. Notify HM Revenue and Customs (HMRC): You must notify HMRC in writing that you wish to cancel your VAT registration. You should also provide details of your taxable turnover and the reason why you are cancelling your VAT registration.
  3. Wait for confirmation: HMRC will review your request to cancel your VAT registration and will confirm in writing if it has been approved.
  4. Stop charging VAT on your sales: Once your VAT registration has been cancelled, you must stop charging VAT on your sales.

Please seek advice

Before making any decisions, it’s advisable to consult an Accountant to ensure you make the right decision for your business. VAT is complicated and there can be large sums at stake. The contents of this website are for general information purposes only and are not advice. Please contact us today for friendly VAT advice.

About Graham

Accountant specialising in tax, property, and estate planning. A regular speaker at landlord, property Investor, and later life planning events.

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