VAT can be a source of curiosity and confusion for business owners. Do you have to register for it or do you choose to? When is it necessary? And why? Is it a good thing?
Though you can choose to voluntarily register for VAT at any time, there is a VAT registration threshold. This means if your business turnover reaches the threshold, you must register.
Far from being a negative compulsory thing, you can see reaching the threshold has a positive – because it means your business is growing! Too many businesses limit their growth to stay under the VAT registration threshold. Although VAT can make life more challenging, with the right help you’ll be just fine.
Because VAT can feel like a bit of an unknown, we’re going to break it down here and give you all the information you need to know about. That way you can get yourself registered if you need to, or be prepared when your time comes around.
VAT stands for Value Added Tax and is a tax on the sale of most goods and services
It is applied whenever “value is added” to a product as it passes along the line from manufacturer to final consumer. There are currently four rates of VAT in the UK:
- Standard rate 20%
- Reduced rate 5% (e.g. on domestic fuel or power – and currently also on hospitality and holiday accommodation)
- Zero rate 0% (for example on children’s clothes and footwear, books and newspapers, basic foods)
- Exempt rate (typically on financial services such as bank fees and insurance, education, sometimes on rent)
There are also goods and services which are outside the scope of VAT and on which no VAT is charged. The main examples are wages and salaries, pension contributions, and taxes.
First things first, you need to decide whether you must register for VAT, by comparing your revenue to the VAT threshold.
Whilst you can register voluntarily, you must register for VAT when your turnover is more than £85,000 (the current threshold)
If your business had VAT taxable turnover (i.e. everything you sell that is not exempt from VAT) of more than £85,000 over the last rolling 12 months, or your turnover will meet or exceed the threshold in the next 30-day period, lawfully you must register.
The rolling 12 month period is significant to remember here. When you’re comparing to the threshold, be aware the turnover calculation isn’t linked to a fixed year, like your tax year or financial year end. It doesn’t reset to 0 on 1st April.
It is calculated on a rolling 12 month basis so it’s important to keep an eye on this to see if you’re getting close to the threshold. If you are using online accounting software like Xero you can run a report each month to work out your turnover for the previous 12 months. Otherwise a simple spreadsheet can do the same thing with a bit more work.
When your business is based outside of the UK there is no threshold at all
If you and your business are based outside of the UK then you have to register for VAT as soon as you supply any goods and services to the UK, or if you expect to in the next 30 days.
If you’re self-employed with several businesses, all your turnover needs to be combined
This differs from limited companies, where are viewed as stand-alone entities (although you can’t artificially separate your business into two limited companies to avoid registering). Your turnover number is really important in both instances, so check out our blog “What is turnover” to understand more about what it is and how to calculate it.
It’s worth noting that if you register late, you must pay what you owe from the period you were meant to have registered, and you may get a penalty depending on how much you owe and how late the registration is.
If your taxable turnover goes over the threshold temporarily, you can apply for a registration “exception” by writing to HMRC. You have to include evidence showing why you believe your VAT taxable turnover will not go over the deregistration threshold (currently £83,000) in the next 12 months.
HMRC will consider your exception and will write to confirm if you get one. Otherwise, they will register you for VAT.
You can of course register for VAT if your turnover doesn’t exceed the threshold but there are some things for you to consider beforehand.
If you’re considering registering voluntarily, it’s worth taking a good look at your client base.
- If they are predominantly VAT registered themselves, they probably won’t mind if you’re VAT registered too, because they will be able to reclaim it from HMRC when they do their own VAT returns. Positively, you’ll also be able to add VAT onto your sales and reclaim VAT on your purchases.
- However, if your customers are UK consumers or non-VAT registered businesses they will not be able to reclaim the VAT included in your sales price. They may choose to go with a non-VAT registered business who has a price advantage over you.
- Perhaps your new business is forecast to grow quickly and it would be beneficial to register for VAT from the beginning. Your customers will get used to paying VAT on your sales from the start and it will eliminate the need of having to adjust your pricing later.
You also need to consider what makes up the bulk of your expenses.
Do they include VAT or are they mostly items that don’t have VAT included such as wages? In this scenario, it wouldn’t be beneficial to register for VAT if you’re below the threshold.
However, if the bulk of your expenses include VAT, then being able to reclaim the VAT on these purchases could reduce your costs and help with cash flow.
Get some support if you’re unsure whether you need to register (or how)
For most businesses, it’s easy to register for VAT online. Make sure you know the really important stuff like the date you have to be registered from. If you are registering because you have gone over the threshold then you have to be registered from the 1st of the month following the one after you went over the threshold. For example if your rolling 12 months turnover goes over the VAT registration threshold in June 2021, you have to be registered at the latest from 1 August 2021.
You’ll be provided with a VAT online account which you can access via your business Government Gateway account. You need this to submit your VAT Returns to HM Revenue and Customs (HMRC) when necessary, unless you are registered for Making Tax Digital for VAT when you have to file via suitable software instead. You must pay HMRC any VAT you owe from the date they register you.
That being said, we do talk about VAT in broad terms in this blog, so we always recommend you speak to an accountant before jumping into it.
You may need more specific advice depending on what goods or services you provide, and help to consider the different tax rates and choice of accounting schemes available. If you import or export then there are lots of other things you need to know about which we won’t go into here.
We’ve helped lots of clients with the move to becoming VAT registered at the right time, in the right way – and can help you feel confident taking this step in your business. You can easily get in touch with our lovely team here if you’re at that point.