As a business owner you should know when you need to register for VAT with HM Revenue and Customs (HMRC). You should also understand the pros and cons of registering voluntarily for VAT if you’re below the current ‘VAT threshold’.
VAT registration threshold
The current VAT registration threshold is £85,000. What this means is, you must register for VAT –
- if you realise that your total VAT taxable turnover is going to be more than £85,000 in the next 30-day period. You’ll have 30 days in which to register (effective from the date you realised).
- if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000. You’ll have to register within 30 days of the end of the month when you went over the threshold (effective the first day of the second month you exceeded the threshold).
You can apply for a registration ‘exception’ if your taxable turnover goes over the threshold temporarily, and you believe your VAT taxable turnover will not go over the deregistration threshold of £83,000 in the next 12 months. You’ll need to write to HMRC and provide evidence.
There are additional considerations if you or your business is based in Northern Ireland or outside the UK.
If you register late you may have to pay a penalty charge in addition to the amount of VAT you’ll owe from the date you should have registered.
Voluntary registration – the advantages
Even if you don’t have to register for VAT you may find it advantageous to do so voluntarily.
- As a VAT registered business you’ll be able claim back the VAT you’re currently paying when buying goods and services.
- If the VAT you’re paying (‘input tax’) is more than the VAT you’re charging your customers (‘output tax’) the difference you claim back from HMRC will be refunded.
- You’ll be able to grow your business without worrying about exceeding the VAT threshold.
- You’ll be signaling to other business that you’re a serious player with a sizeable turnover and that positive impression may actually translate into more sales and loyal customers.
- If you register ‘voluntarily’ before you’ve reached the turnover limit you can under regulation 111 claim back the VAT on your set up costs (which can be back dated up to 4 years for goods and 6 months for services purchased in order to support your taxable business activities when registered).
- If you don’t reach the VAT turnover limit you can deregister and reclaim VAT relating to your taxable business activities during the registration period.
Voluntary registration – the disadvantages
There may be a downside in registering voluntarily for VAT.
- It’ll be an additional administrative burden for you as you’ll need to keep accurate VAT records, and you’ll need file your returns on time to HMRC using appropriate accounting software.
- You’ll have to add 20% VAT onto your selling prices and that means higher prices for any of your customers who aren’t themselves VAT registered. (Your VAT registered customers will just claim back the VAT when filing their own VAT returns so it won’t matter to them.)
- If the amount of VAT you’re passing on to customers (‘output tax’) is more than the VAT you’re paying for goods and services (‘input tax’) you’ll have to pay the difference to HMRC and so you’ll need to be putting money aside in order to cover that bill.
- If your purchases and sales vary from period to period you may find it difficult to plan financially, and if you receive a much larger VAT bill than you were expecting it could create a cashflow problem.
If you’re currently below the VAT threshold you’ll need to consider the advantages and disadvantages of VAT registration carefully.
HMRC will probably change the VAT threshold at some point so you should check the amount each financial year to keep yourself informed.
VAT Schemes
There are a number of different VAT schemes open to businesses so it’s important to know which one is most suitable for your circumstances before you register.
VAT Flat Rate Scheme
A VAT-registered business will normally pay or claim back from HMRC the difference between the VAT it charged to customers and the VAT it paid on purchases. But you can join the Flat Rate Scheme if your taxable turnover is likely to be £150,000 or less (excluding VAT) in the next 12 months. You’ll pay a fixed percentage of your turnover to HMRC. There are different percentage rates set for different business types. Although you can’t reclaim the VAT on your purchases you can keep the difference between what you charge your customers and what you pay to HMRC.
VAT Cash Accounting Scheme
A VAT-registered business will normally report the value of its sales and purchases and pay any VAT owing to HMRC even if the invoices haven’t been paid. Under the Cash Accounting Scheme, however, you pay VAT on your sales when your customers pay you and reclaim VAT on your purchases when you have paid your supplier. You can join the Cash Accounting Scheme if your VAT taxable turnover is £1.35 million or less.
VAT Annual Accounting Scheme
A VAT-registered business normally submits VAT Returns and payments to HM Revenue and Customs four times a year. However the Annual Accounting Scheme allows you to make advance payments towards your bill throughout the year (based on your last VAT return or estimate if newly registered) and submit just one VAT return. If your actual VAT bill is more than what you’ve already paid then you pay the shortfall to HMRC. But if you’ve overpaid your VAT bill you claim back the overpayment and it’ll be refunded. You can join this scheme if your estimated VAT taxable turnover is £1.35 million or less.
These are the main VAT options, although there are VAT Retail schemes and VAT Margin Schemes and various special rules that may apply to your particular business sector. You should consult HMRC or a tax specialist to find out more.
Related post – What Is Making Tax Digital (MTD)?
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