Who needs to be VAT registered?
Determining whether your business should register for VAT in the UK involves understanding your taxable turnover, the benefits of voluntary registration, and the various VAT schemes available.
What is VAT?
Value Added Tax (‘VAT’) is a tax on transactions. It is charged at each stage of the supply chain – not just when a final product or service is delivered.
VAT registered businesses need to charge VAT on their goods/services and should be able to reclaim VAT on their business expenditure. However, VAT can be a real cost for some businesses, such as those in the EdTech and FinTech sectors. This is because education and financial supplies are exempt and such organisations are unable to register for VAT, unless they also provide taxable services (more on that below).
Although the ability to reclaim VAT you incur on business expenditure is attractive, there are situations where not being VAT registered could be beneficial. If you supply businesses that cannot recover VAT e.g. financial institutions or education providers, your prices can be more competitive if you do not charge VAT, so you may want to defer registration for as long as possible.
What are the implications of being VAT registered?
If you are VAT registered, you will:
- Pay VAT on your purchases (input VAT);
- Charge VAT on your sales (output VAT); and
- At the end of your accounting period (usually the end of every quarter), account to HMRC for the difference between the input VAT and output VAT and pay the relevant amount to HMRC. If your input VAT exceeds your output VAT then you will be due a VAT refund.
If you are in the start-up phase or are a significant exporter, it is advantageous to submit your VAT returns as soon as possible to accelerate the cash due back to you.
When must your business register for VAT?
The requirement to register for VAT can apply to companies, sole traders and partnerships.
Compulsory VAT registration
These are the two most common scenarios when you would become responsible for VAT registration:
- At the end of any month, the value of your taxable supplies (see below) for the previous 12 months has exceeded £90,000 (this threshold is subject to change). It is helpful to keep a monthly rolling tracker of the total taxable supplies you have made each month to stay on top of this; or
- If at any time you expect the value of your taxable supplies for the next 30 days to exceed the £90,000 threshold.
You may need to register in respect of a one-off event if this means you exceed the £90,000 limit.
Example
HT Limited has developed a productivity app to help individuals manage their monthly tasks and has sold £50,000 of licences as of March 2024. The company wins a large contract for £200,000 with CH Plc, a national employer in the construction industry. CH Plc intends to give all of its employees access to the app in April 2024 to improve organisational productivity.
Although a one-off contract, HT is required to register for VAT and charge VAT on its sale to CH.
HT Limited may be entitled to subsequently deregister for VAT if this is a one-off contract, it will depend on HT’s expected taxable sales in the next 12 months.
Whilst the new Labour Government has ruled out a rise in the rate of VAT, it is possible that the VAT registration threshold could be lowered. This could force businesses that operate near the threshold to register.
If you are concerned about how compulsory VAT registration will impact your buyer habits e.g. if you are a B2C business and your consumers cannot recover the VAT that they pay, you may want to consider if working fewer hours or selling fewer goods/services will help you remain price competitive. The answer will depend on how your business is expected to grow so we would recommend some scenario planning to understand how VAT registration impacts your cash flow.
Voluntary VAT registration
Even if your turnover is below the threshold, you can voluntarily register for VAT. This can be beneficial for several reasons:
- Reclaiming VAT: Registered businesses can reclaim VAT on purchases and expenses.
- Business perception: Being VAT-registered can enhance the credibility of your business.
- Avoiding penalties: If you anticipate your turnover will exceed the threshold soon, registering early can help avoid penalties.
It is possible to backdate your registration up to four years, as long as your business made or intended to make taxable sales in those earlier years. This can help improve your cash flow by reclaiming your input VAT but does is not help all business e.g. a business that incurs little VAT on its expenditure but makes taxable supplies below the threshold.
Intending trader registration
If you have just started trading, are yet to make any taxable supplies (but intend to in the future), and are incurring input tax on your start-up costs, you may apply to be registered.
Example
CS Limited provides cyber security services to corporate customers. In January 2024 CS incurred VAT of £25,000 on the initial costs of purchasing computer equipment and software to enable the company to deliver services to clients. However, additional certifications and training are required before CS can offer its services to customers and the company doesn’t expect to generate any income until November 2024.
CS may need to prove to HMRC that it intends to make taxable supplies by providing:
- details of business arrangements they have made e.g. obtaining certifications, renting premises.
- copies of customer contracts they have in the pipeline.
- details of what assets they have bought for the business.
- staff that they have employed.
HMRC will not always ask for the above information and recently we have seen clients being granted an intended trader registration from the online application process alone (see below). We would advise you to make an accurate income projection and supply this to HMRC when asked about the expected future value of your taxable supplies in the next 12 months.
HMRC can ask an intended trader to repay input VAT where they think there is no intention to start a business e.g. if there are years of VAT reclaims without the businesses generating any sales. However, if you abort a venture for genuine commercial reasons then this problem should not arise.
Voluntary VAT registration
Where you make taxable supplies for business purposes, even though the value of those supplies is below the registration threshold, you may still apply to be registered.
This can be valuable to UK exporters whose supplies would be taxable if made in the UK e.g. if your company provides technology consultancy services to US business customers, you can apply for registration even if the value of these supplies is below the VAT registration threshold. This means that input tax can be claimed on UK expenses in the usual way.
What are taxable supplies?
When calculating the turnover of your business for VAT registration, you only need to consider the value of taxable supplies.
Taxable supplies include supplies that would be taxed at the standard rate, reduced rate or zero rate e.g. the supply of computer software is usually taxed at the standard rate.
In most situations you must also include the value of services received from overseas e.g. if you outsource some of your software development to India and you are charged £150,000 per year, you will exceed the registration threshold.
Common types of income that can be ignored when calculating the VAT registration threshold includes:
- Services supplied to a non-UK business customer e.g. tech consultancy provided to customers in Spain.
- Interest income.
Types of VAT schemes
There are several VAT schemes available, each with its own set of rules, benefits and drawbacks. You can find more about the various schemes here.
How to register and pay VAT
VAT registration
Most businesses can register for VAT online and start charging/reclaiming VAT from the date of registration. You can also ask an Accountant to register for VAT for you.
To register as a limited company you will need to provide your other tax registrations, your Companies House registration number, your bank account details and details of your annual turnover.
To register as an individual you will also need to provide your NI number, a form of ID, plus information from your Self Assessment return and payslips.
Once registered you will receive a VAT number and details about how to set up your HMRC VAT account.
VAT payments and returns
HMRC will send you information on when to submit your first return and make payments. This is usually quarterly with returns and payments due a month and 7 days after the end of the period e.g. if your quarter end is 31 March 2024 your filing and payment date will be 7 May. If paying by direct debit this should be taken automatically by 10 May.
If you are automatically enrolled into the annual accounting scheme this can have a detrimental impact on your cash flow if you are in the start-up phase. You can ask HMRC to move to quarterly returns so that you can recover your input VAT more quickly.
Penalties for non-compliance
Failing to register for VAT when required, or filing and paying VAT late, can result in significant penalties. HMRC may impose fines based on the amount of VAT owed and the length of time the business was not registered. Additionally, interest may be charged on any unpaid VAT.
Key takeaways
- Determining whether your business should register for VAT in the UK involves understanding your taxable turnover, the benefits of voluntary registration, and the various VAT schemes available.
- Staying compliant with VAT regulations is crucial to avoid penalties and ensure smooth business operations. If in doubt, consulting with a tax professional or accountant can provide tailored advice for your specific situation.
- The onus is on the supplier to charge VAT correctly.
- The VAT rules related to your particular business need to be understood if you are to pay the correct amount. Paying too little means that you have to pay interest when you discover the error. If you fail to spot errors before HMRC, you may also be charged a penalty.
- If you overpay because of your own mistake, you do not get any interest when you find and claim it. There are also time limits for correcting mistakes.
- The VAT at stake on business transactions can be greater than any Income Tax or Corporation Tax applicable. The VAT rate on the transaction can often be greater than the profit on it too.
- Ensure customer contracts state ‘VAT is applicable’ to avoid customers who refuse to pay VAT on top of your services. It can be helpful to discuss any uncertain VAT treatments with your customers upfront to avoid delays in payment once an invoice has been issued.
- Particularly complications arise when you have any of the following situations:
- Sales to another country
- Provide taxable and non-taxable supplies (known as ‘partial exemption')
- Transactions with related companies
- New products or services
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TR Tax Advisers Limited. Companies House registration number 15693007. Registered office address 128 City Road, London, EC1V 2NX. Trading address 197 St. John's Road, Walthamstow, London, E17 4JL.
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