When to register for VAT

If you run a business, then understanding when to register for VAT is vital for compliance, and for planning the future and overall financial health of your business.

Overview

VAT is charged on most goods and services provided by VAT-registered businesses in the UK. It also applies to specific goods and services imported from outside the UK. Because your business collect this tax on behalf of HMRC this means that the burden of the tax falls on the final consumer not your business, which it is why it is referred to as an indirect tax.

There are 3 main rates of VAT in the UK which are as follows:

The Standard Rate (20%): This is the default rate applied to most goods and services.
Reduced Rate (5%): Applied to certain goods and services, for example children's car seats and home energy.
Zero Rate (0%): While these goods and services are still regarded as VATable, the rate is actually 0%. Some examples of zero-rated supplies would be children's clothing and digital publications.

It's important for you to understand which VAT rate might apply to your business, because this will affect how much VAT is charged on the goods and services you offer. So as well as knowing when to register for VAT it is important to use the correct rate .Failure to do so can lead to significant compliance issues and financial penalties.

When VAT registration can be applied for

Essentially, four conditions must be met before VAT registration can be applied for:

There is a taxable supply of goods or services, that is a supply which is zero-rated, reduced-rated or standard-rated. Knowing what is considered VATable turnover will also help you know when to register for VAT.
The place of supply is in the UK,
The supply is made by a taxable person, that is a person or body carrying on an economic activity. A taxable person can be a sole trader, partnership or limited company.
The supply is made in the course or furtherance of a business carried on or to be carried on by that person.

Mandatory VAT registration

Mandatory VAT registration for UK businesses is required in the following circumstances:

Historic turnover test

This test is retrospective and is a rolling 12-month test. At the end of each month, you consider the total taxable supplies made in the previous 12 months and check if that total is in excess of the VAT registration threshold.

When you breach the VAT threshold under the historic turnover test, you must notify HMRC within 30 days of the end of the month in which the threshold is crossed by completing a VAT registration form. HMRC will register you from the first day of the second month after the point the VAT threshold is crossed.

Future turnover test

This test is forward-looking, and only ever considers 30 days at a time. At any point, if there is an expectation that the taxable supplies made in the next 30 days alone will exceed the VAT threshold, currently £85,000, registration is required.

If you expect to meet the future turnover test, you must notify HMRC before the end of that 30-day period, by completing the VAT registration form. HMRC will register you from the beginning of the 30-day period.

You must register for VAT if you purchase a business which is a qualifying VAT transfer of a going concern, or you start to run a similar business to one which previously operated from the same premises. Additionally, if you take over an existing business you might need to register to VAT.

Voluntary registration

Whilst mandatory VAT registration is required when you reach the threshold of £85,000 it's also possible to register voluntarily for VAT provided you fulfil these conditions, irrespective of your turnover. Voluntary registration can be backdated by up to four years provided your business was making taxable supplies or intended to carry on such a business at that time.

Advantages of Voluntary Registration

Reclaiming VAT: Once registered, a business can start reclaiming VAT on its purchases. This can be particularly advantageous for startups and small businesses with significant initial expenses.
Business Credibility: Being VAT registered can enhance a business's profile, portraying it as larger and more established. This can be beneficial when dealing with other VAT-registered businesses.
Preparation for Growth: Voluntary registration can be a proactive step for businesses anticipating rapid growth. It eliminates the need for a sudden adjustment when the compulsory threshold is reached.

Some advantages of voluntary VAT registration are the ability to recover VAT on purchases, enhanced business credibility and avoids missing the pitfalls of missing the registration deadline once the threshold is reached.

However, some of the downsides of voluntary VAT registration are the additional admin involved with Making VAT Digital, and the impact on your competitive pricing policy if your customers are not VAT registered and can't recover the VAT you charge them.

VAT registration pitfalls to avoid

Navigating the complexities of VAT registration can be challenging, and mistakes can prove costly. Knowing when to register for VAT is crucial for businesses to ensure compliance and avoid unnecessary penalties. We've set out below some of the most common VAT registration pitfalls and how to avoid them

Misunderstanding the Threshold: One of the most common errors is misunderstanding the VAT registration threshold. Remember to regularly monitor your turnover and consider the tests above to ensure you register for VAT when required.
Incorrect VAT Charging: Charging the wrong VAT rate on goods or services can lead to significant issues. Ensure you understand which VAT rate applies to your products or services – standard, reduced, or zero rate.
Delayed Registration: Delaying VAT registration until after exceeding the threshold can result in penalties. As soon as you realise that your turnover will exceed the threshold, start the registration process.
Poor Record Keeping: Inadequate record-keeping can lead to errors in VAT returns and issues with HMRC. Maintain meticulous records of sales, purchases, and VAT charged and reclaimed.
Overlooking VAT on Imported Goods: If you import goods or services, you need to account for VAT on these transactions. This can be a complex area, especially post-Brexit, so seek advice if you're unsure.
Neglecting VAT Returns and Payments: Failing to submit VAT returns and payments on time is a common mistake. Set reminders for these critical deadlines to avoid penalties and interest charges.
Not Reclaiming VAT Correctly: Businesses often miss out on reclaiming VAT they're entitled to, particularly on capital purchases or business expenses. Ensure you're reclaiming all VAT you're eligible for.
Handling VAT on Discounts and Free Gifts Incorrectly: VAT needs to be accounted for correctly on discounts, free gifts, and other promotional items. The rules here can be intricate, so it's worth getting them right.
Assuming VAT Processes Remain Constant: VAT regulations can change. It's important to stay updated with any changes in VAT law that might affect your business.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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When to register for VAT

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