VAT is a complex tax that is administered entirely by the taxpayer, the business. HMRC expect the business to know how to manage the tax and to operate reliefs, simplifications and apply all the complex VAT rules to comply. Failure to do so will result in interest charges and penalties. Over the next few months some basic guidance on how to manage VAT will be provided, but this will be general guidance and it is the businesses’ responsibility to ensure that it applies to their particular situation. This month VAT registration will be examined.
A business must register for VAT when their turnover exceeds the VAT registration threshold in the past 12 months, or you know you are going to exceed the threshold. This is currently £85,000. You must register for VAT if your taxable turnover exceeds the threshold in the last 12 months, or if you expect you will exceed the threshold in the next 30 days.
Points to bear in mind are as follows.
- Only taxable turnover is included, that is sales that are zero-rated, subject to VAT at the lower rate or subject to VAT at the standard rate, but does not include exempt sales.
- The 12-month period must be examined at the end of each month, not at the end of the financial year. If the business is nearing the threshold, you must monitor taxable supplies each month.
- The value to be included in the registration threshold calculation includes:
- goods hired or loaned to customers
- business goods used for personal purposes
- goods bartered or part exchanged
- services received from businesses outside the UK (items subject to the “reverse charge”)
- building work over £100,000 if the business did it for itself.
It can be difficult to determine what sales are exempt from VAT. This is a complex area and professional advice must be sought if it is thought that exempt sales are made. Understanding exempt sales is important as you do not charge VAT on exempt sales, they do not count towards the registration threshold and no VAT on expenditure that relates to the exempt sale can be reclaimed. Examples of sales that can be exempt include:
- some property transactions (but not garage lets, parking fees, holiday or hotel accommodation or new sales of residential property)
- betting and gaming
- credit transactions
- some education supplies
- some membership subscriptions
- some health services
- undertaker services.
VAT registration date
The date of VAT registration when the threshold was exceeded in the past 12 months is at the end of the month the turnover threshold was exceeded. The business has 30 days after the end of the month where the turnover has been exceeded to notify the need to register and the date of registration will be the first of the next month.
Example: JD Fabrics sells £20,000 of goods (all standard rated goods) each month and the business commenced on 1 January. Cumulative sales are:
By the end of May, the threshold has been exceeded. HMRC needs to be notified of this by 30 June and the effective date of registration will be 1 July. From 1 July, VAT needs to be charged on all sales made, other than zero-rated sales and exempt sales. VAT incurred on expenses and goods purchased for resale can also be reclaimed.
Should you realise that the threshold will be exceeded in the next 30 days, you are required to register immediately. If, for example, you realise on 15 January you will exceed the threshold in the next 30 days, you must notify HMRC within 30 days, and you will be registered with effect from 15 January. VAT must be charged on all sales from 15 January. As you do not have a VAT registration number yet and are not yet actually registered you cannot issue a VAT invoice nor show VAT on an invoice. You can, however, charge an amount that includes the VAT that will be charged and issue a VAT invoice when the VAT number is issued to you to enable the customer to reclaim the VAT charged. For example, if the sale is £100 you will need to charge £120 including VAT. When the VAT number is issued you will issue a VAT invoice showing VAT of £20. Alternatively, you may initially issue an invoice for just £100 and later issue a VAT invoice for the extra £20 VAT.
A business can register for VAT even when its turnover is less than £85,000. This is advantageous where the business’s customers are also in business and can reclaim the VAT they are charged. Voluntary registration will allow the business to reclaim VAT on expenses and goods bought for resale. Although it has to charge VAT on its sales, its customers can reclaim the VAT charged. It is disadvantageous to voluntary register where the customers cannot reclaim VAT, usually where the customers are members of the public. This is because they cannot reclaim the VAT charged and the VAT is an extra cost increasing the sale price of goods sold or services supplied.
When do you not have to register?
Registration is compulsory if you exceed the threshold. There are, however, two exceptions. The first is where you make mainly zero-rated sales. It is necessary to contact HMRC and use the online registration process (or write to the registration service in Wolverhampton) to give the details of the supplies that the business makes. If HMRC does not agree that the majority of supplies made are zero-rated, you will be registered for VAT under the normal rules.
A second exception to VAT registration is where you believe the threshold is only going to be exceeded temporarily (for example you have an unusual one-off large sale). It is necessary to write to HMRC explaining that the threshold has been exceeded but you expect that future sales will not exceed the deregistration threshold in the next 12 months. The deregistration threshold is £2000 below the registration threshold and is currently £83,000.
Whilst this enables the price charged to the customer to be lower (as no VAT is charged on reduced rate or zero-rated sales), this is only advantageous where customers cannot reclaim VAT, as VAT on expenses cannot be reclaimed.
Claiming input tax
Input tax is the VAT incurred by the business on goods bought for resale or business expenses. This VAT can be reclaimed on the business’s VAT returns. The business can also reclaim VAT on a number of expenses incurred prior to registration. This includes any goods acquired in the previous four years if the business still has the goods (or where they have been used to make other goods that the business still has) or on services received in the previous six months. To reclaim the VAT incurred, it is necessary to have purchase VAT invoices that support the claim for input tax. In addition, the goods or services that were acquired before registration need to be included in a list giving a description of the items, the purchase date and a description of how they were used in the business.
Where the business consists of more than one body corporate (that is companies or limited liability partnerships) they can register as a single VAT registration. This means that only one VAT return is submitted for all the group members and VAT is only charged on sales to non-group entities. VAT is not charged on sales within the VAT group. Should it be considered that a group would be advantageous further advice should be sought to ensure all the advantages and disadvantages are understood.
Transfers of Going Concerns
Where an existing and ongoing business is acquired, the acquisition will be treated as a transfer of a going concern. No VAT will be charged on the transfer of the business, but the person acquiring the business will need to register for VAT immediately. Where a business is not transferred but a collection of assets is acquired, VAT will be charged on the sale of the assets. The acquiring business will probably want to register for VAT to reclaim this VAT charged.
When there has been a transfer of a going concern, it is possible to transfer the existing VAT number. This seems helpful as it provides continuity but it is often not advisable as any VAT liabilities will also be transferred. It is usually recommended not to transfer the VAT registration number to ensure that the old business’s VAT liabilities are not transferred to the acquiring business.
Special rules for Northern Ireland
A business that is based in Northern Ireland that only makes VAT exempt sales will need to register for VAT if it buys goods valued at more than £85,000 from EU VAT registered suppliers to use in the business. This does not apply to business in England, Scotland and Wales as these goods acquired will be treated as imports and VAT will be charged at the point of import.
There are also special rules for moving goods to and from Northern Ireland and the EU.
HMRC contacts and registration process
Registration is undertaken through the Government Gateway.
Where it is not possible to use the online service, the relevant forms can be completed and posted to the VAT registration section at:
HM Revenue and Customs
VAT forms are available here.
Enquires can made through the VAT helpline on 0300 200 3700.
HMRC provides a public notice regarding VAT registration that can be found here.