When do businesses need to register for VAT?
Mar 12, 2019
With the new rules for Making Tax Digital (MTD) for VAT coming into force from 1 April 2019, it’s now even more important to know whether you need to register your business for VAT (either now or in the future) in order to avoid a fine from HMRC.
What is the VAT threshold?
The current VAT registration threshold in the UK stands at £85,000. In his 2018 Budget last October the Chancellor Philip Hammond confirmed that this threshold will be frozen until 31 March 2022. Over the past ten years the VAT threshold has risen significantly, and it’s important to keep checking the threshold each financial year as the figure may well be liable to change.
When do I need to register for VAT?
If the annual turnover of your business exceeds £85,000, then you must register for VAT in order to continue trading legally. To be sure, check whether your business meets either of the following two conditions:
- At the end of any given month, the value of the taxable supplies you have made in the past 12 months (or fewer) has exceeded £85,000. Note that this figure should be calculated on a rolling 12-month basis and not on the turnover in a particular calendar year.
- At any time, you anticipate that the value of taxable supplies that you’ll make in the next 30 days alone will exceed £85,000.
If you meet either of these conditions, you must register your business for VAT within 30 days or you may be liable to a fine. Fines for missing a VAT registration point can be steep – e.g. 30% of the amount of late-paid VAT, so it’s important to keep on top of your annual turnover!
If your turnover exceeds £85,000 over a rolling 12 month period, you’ll need to start charging VAT on the first day of the second month after you exceed the threshold. If you exceed the threshold in a single 30-day period then you must start charging VAT immediately.
Can businesses under the threshold register for VAT?
Yes. Some businesses choose to voluntarily register for VAT, even if their turnover is under £85,000. There are a couple of key advantages to doing this – firstly, you can reclaim any VAT you’re charged when you pay for goods and services. Secondly, being VAT registered sets you up in readiness to grow your business, and conveys a positive impression that you have serious plans to expand in the future.
There are of course disadvantages to consider too. Being VAT registered entails a lot more paperwork, and will require you to complete and send a VAT return to HMRC every quarter via the new MTD system. If your customers are the general public (rather than other businesses), it also means that you’ll have to pass on higher prices to them in order to cover your VAT.
Which VAT scheme should I go for?
There are three main VAT schemes available to businesses, and so you’ll need to think about which one could work best for your individual circumstances.
Annual accounting requires you keep your annual taxable turnover at £1.35 million or below, and allows you to submit only one VAT return annually. You need to make advanced VAT payments through the year, and then when you file your VAT return at the end of 12 months you either pay the outstanding balance or claim a refund for any overpayments.
Cash accounting also requires your annual taxable turnover to be under £1.35 million. Under this scheme your VAT is calculated from your actual cash receipts and payments, so you only need to pay for the VAT income you’ve actually received during that specific quarter. This means that you can’t claim back any VAT based on invoices which haven’t yet been paid, but equally you don’t have to pay any VAT on those outstanding invoices either.
The Flat Rate scheme is only open for businesses with an annual turnover below £150,000. It allows you to pay VAT based on a fixed percentage of your sales, and the percentage rate you pay is dependent on the type of industry you operate in – see the full list of industries on HMRC’s website. You can keep any difference between what you charge your customers and the amount of VAT you pay to HMRC, but this scheme does mean that you can’t claim back VAT on any purchases you make
(other perhaps than on a capital asset costing more than £2,000 including VAT).
How do I register for VAT?
The best way to register for VAT is online. In order to complete your registration you’ll need the following details available:
- Your company number and registered address (if applicable)
- Your business bank account details
- Your UTR – unique tax reference number, a ten digit figure which you receive when registering your business
- Information about any related businesses from the last two years
Once your VAT registration has been processed, you’ll receive a VAT registration certificate (VAT4). It will contain information about your VAT registration number, your effective date of registration and the date your first VAT return is due. You’ll need to quote your VAT number on all your relevant invoices going forwards.
VAT can be a very tricky area. Before you register for VAT, it pays to get advice on what scheme to go for. If you have any questions about whether your turnover is likely to hit the threshold, or if you’d like some help with choosing the best scheme, then please get in touch with the PT team and we’ll be delighted to help.