Do I need to register for VAT?

The short answer: If your business exceeds a taxable turnover of £85,000 then yes, you will need to register for VAT.

Understandably, there is often misinterpretation over what actually counts towards this figure and when it applies.

To clarify:

Your business will need to register for VAT if over any rolling 12 month period your ‘taxable supplies’ (i.e. if you have sold or hired anything that is not exempt from VAT, even if it is zero-rated) have exceeded £85,000.

Three key points that need emphasising are:

  • Taxable supplies are based on your sales/turnover NOT your profit
  • The 12 month period is on a rolling basis NOT your financial calendar year
  • This applies to any business whether you’re a sole trader, limited company or limited partnership

 

It is your responsibility (or in Link’s clients cases, our responsibility as your virtual financial department) to keep monitoring your taxable turnover, as it’s not possible to rely on annual reports to give you the full picture. These only show you your financial year, and not whether you’ve exceeded the threshold either side of your year-end.

It is also worth noting that HMRC also expects you to register for VAT if you anticipate your VAT taxable turnover to be more than £85,000 in the next 30 days.

Finally, if you take over an existing business that is already registered for VAT, you may also need to register. If the combined taxable turnover of the two businesses in the last 12 months exceeds the VAT registration threshold, you’ll be required to register.

When do I need to register?

HMRC necessitates you register for VAT within 30 days of your turnover reaching the VAT threshold or if you anticipate it being reached in the next 30 days.

If you reach the threshold over a 12 month period, your date of registration will be the first day of the following month, for example:

  • ‘MadeUp Web Design Agency Ltd’ based in Banbury has been growing its turnover year on year; last year they turned over £70,000, but thanks to an increase in people shopping locally over the past 5 months, their turnover surpassed the £85,000 mark over the period August to July. They will have until the end of August to register and their ‘effective date of registration’ will be the first day of the following month, in this case, 1st September.

 

However, if you anticipate reaching the VAT threshold in the next 30-day period alone, then the timings for registration differ slightly. Your effective date of registration will be backdated to the date at which you realised you would exceed the threshold. Let’s put this into an example to see it clearly:

  • Oxfordshire based ‘JN Plastics’ used to turnover around £6,000/month pre Covid-19. But with the global need to implement plastic screens in all indoor public places they received a vast order from a national supermarket for £87,000 in May. This will mean that JN Plastics will exceed the VAT threshold over the next 30 days, so they’ll need to register for VAT straight away so the large order will be subject to VAT.

 

What happens if I don’t register on time?

If you don’t register within the 30 day period you’ll still be expected to pay everything you owed from the date registration should have been effective, potentially with added interest.

HMRC is also likely to charge a penalty based on how much tax you owe, how late the registration is and any circumstances around the case.

Their range of punishments to choose from include:

  • A failure to notify penalty
  • A late registration penalty
  • A civil evasion charge

 

Is there any benefit to voluntarily registering for VAT?

There are advantages and disadvantages for voluntarily registering for VAT, and they will impact each business in different ways, let’s take a look:

Advantages:

  • Your business will be able to reclaim VAT on purchases
  • You avoid facing any penalties for late registration should you exceed the VAT threshold
  • If you expect to register for VAT at a later date, you may need to adjust your prices and accounting process. Registering for VAT early on means you don’t need to spend time making these changes
  • You can reclaim any VAT that you have incurred on:
    • Goods acquired in the last 4 years that are still owned at the date of registration
    • Services supplied for the purpose of the business in the 6 months prior to registration

 

Disadvantages:

  • Probably the main disadvantage is the price of your products may appear more expensive to your customer
  • You will be taking on all the extra administrative demands of being a VAT registered business (VAT Returns, maintaining VAT records, keeping track of VAT invoices and receipts)

 

This is a useful starting point but there are many more things to be aware of in relation to VAT.

If you have any questions about how to register, or need any assistance dealing with HMRC and simplifying VAT – we offer potential new clients a 30minute free consultation and we’ll be happy to help.

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Huw Moseley
huw@link-accounting.co.uk