Value-added tax (VAT) is a significant part of the UK tax system, and for many business owners, it can seem like a minefield. Understanding if and when you need to register for VAT is crucial to remain compliant and avoid unnecessary penalties.
A business must register for VAT when its taxable income reaches a certain threshold on a rolling 12-monthly basis. When this occurs, the business has one month to register for VAT. A business can register for VAT voluntarily if it is more tax efficient, e.g. when selling to VAT-registered businesses.
Whether you are a new or growing business, it is essential to know the thresholds and requirements for VAT registration. This article will provide all of the information you need to know about if and when to register for VAT.
For specific VAT advice, please get in touch with the VAT experts at Spotlight Accounting.
Why do businesses need to register for VAT?
There are various reasons that businesses must register for VAT, not least that it is a legal obligation! Let’s look at that in more detail and some of the other reasons.
Legal requirement – It is a legal requirement for a business to register for VAT once its taxable turnover exceeds a certain threshold. Failure to register for VAT can incur significant penalties and legal consequences.
To claim input tax – If a company supplies other VAT-registered companies, registering for VAT is beneficial, as it will enable it to claim VAT back on purchases.
Credibility – Being a VAT-registered business demonstrates financial stability, enhancing credibility and opening new doors.
Business growth – When a business is expected to grow beyond the VAT registration threshold, registering early can help alleviate the administrative burden and allow customers to be updated in good time to avoid upheaval.
Assists international trade – VAT registration is often a condition of supply for international trade. It enables businesses to comply with import and export regulations and facilitates transactions with customers and suppliers in EU countries and the rest of the world.
What is the VAT registration threshold?
The current VAT registration threshold is £85,000. The current rate of VAT is 20%
This applies to VAT taxable turnover, so it is important to understand VAT on your sales. For example, some sales may be VAT exempt, such as certain education supplies or rental income. These VAT-exempt goods and services do not count towards VAT-taxable turnover.
VAT taxable turnover is based on a rolling 12-month basis, so it’s essential to check progress towards the VAT threshold every month rather than annually.
You have 30 days from the end of the month in which your company exceeded the threshold to complete a compulsory VAT registration. HMRC will then issue a VAT registration certificate, VAT registration number and a registration date (which is the first day of the second month your company exceeds the threshold).
For example, if your business exceeded the threshold in February 2024, you have until 30th March 2024 to register, and your registration date will be 1st April 2024.
Do you pay VAT on profit or turnover?
Neither. VAT payment is the net of output tax charged to customers and input tax paid on purchases from suppliers.
So, for example, if you are a VAT-registered business selling goods to a customer for £1,000, you must add £200 (20%) VAT onto the invoice. You are effectively collecting £200 tax to pass on to HMRC.
Say those goods cost £500 to supply; your supplier will charge you VAT at 20%, so the total value of the invoice will be £600. When you pay £600, £500 is the cost to your business, and you can reclaim VAT of £100 from HMRC by deducting it from the total on your VAT return.
On that note, as seasoned VAT experts, Spotlight Accounting always recommends having a separate bank account to set aside your VAT liability. This avoids the risk of coming up short when your VAT payment is due, helps maintain clear financial records and simplifies the quarterly VAT return process.
Using a different example, an online seller buys goods for £50 and sells them for £100. Before registering for VAT, the profit on each item was £50. However, as the customers are not VAT-registered businesses, the seller cannot simply increase her prices by 20%, or she risks losing business.
When the seller exceeds the VAT threshold, £16.67 of the £100 sale is VAT, and £83.33 is the new sales cost. The seller can now recover £8.33 of the £50 cost in VAT, making her profit £41.66. So the cost of VAT registration is £8.34 per product.
How do I know if my business needs to be VAT-registered?
As a business owner, it is your responsibility to monitor your taxable sales and register for VAT within HMRC’s timeline if your taxable income exceeds the VAT threshold.
This is why we recommend using accounting software such as Xero to monitor your income to ensure that you meet your VAT obligations.
Should I register voluntarily for VAT?
Many businesses opt for voluntary registration before their turnover passes the VAT threshold. The main reason for doing so is when your customers are VAT registered, and you are paying input tax on your supplies.
Using the example above, if the business was not registered for VAT, then £1,000 would be charged to the customer, and the cost of the goods would be £600. The business could not reclaim the £100 VAT, so the profit on the sale would be £400.
If the business registered for VAT then the profit rises to £500, as they would be able to reclaim VAT on the cost of the goods.
Before opting for voluntary VAT registration, it is wise to speak to an accountant. At Spotlight Accounting, we have advised many clients on voluntary registration and can help determine if it is the right choice for you and your business.
Who is exempt from VAT registration?
To be exempt from VAT registration, your business’s taxable sales must be below the VAT threshold of £85,000.
Businesses selling exempt goods and services do not have to register for VAT either, including financial and insurance services, medical treatment, education and some cultural and sports services.
VAT schemes to be aware of
When registering for VAT, it’s important to choose a VAT scheme that is beneficial to your business. Let’s look at the different types of VAT schemes.
VAT flat rate scheme
The VAT flat rate scheme is the least complicated option. VAT is based on a flat rate percentage of your VAT-inclusive turnover. You still charge the standard rate of VAT on your invoices to customers and recover the input VAT from suppliers on your VAT return.
If the VAT payable is less than the VAT charged, the business gets to keep the profit.
To be eligible, your business must have annual sales between £150,000 and £230,000.
VAT cash accounting scheme
This scheme is available to all businesses with an annual turnover of £1.35 million or less. There is no need to register for the scheme.
The cash accounting scheme for VAT calculates the amount payable to HMRC based on the actual payment dates of invoices. This means that the VAT is only paid in the quarter when customers pay their invoices and suppliers’ bills are settled. This is different from the standard accounting scheme, where VAT is calculated based on the invoice date.
This scheme can be particularly beneficial to small businesses as it helps with cash flow due to not having to pay HMRC for VAT that has been charged to customers and not received.
VAT annual accounting scheme
The VAT annual scheme is a simplified method of reporting VAT, open to businesses with a turnover of £1.35 million or less.
In a nutshell, businesses file one VAT return per year and then make advance payments throughout the year based on HMRC’s estimate.
When the subsequent annual VAT return is filed, a balancing payment is due, or a refund is issued for the overpayment.
What happens if you don’t register for VAT?
VAT is a legal obligation, so if your business exceeds the threshold, then it must register for VAT. If you do not register your business for VAT within 30 days of the end of the month, the threshold is exceeded, and you could face fines and penalties from HMRC.
Not only that, late registration can be very costly to your business, as it may end up suffering the VAT on taxable sales that should have been charged to customers.
How can Spotlight Accounting help with VAT?
Like any other sort of tax, if you are liable for VAT, it is not optional. As a business owner, it is your responsibility to keep track of your taxable supplies and register for VAT in good time.
The VAT team at Spotlight Accounting can assist you in planning for VAT registration and managing the registration process. They can also set you up with the latest accounting software to help maintain spotless VAT records and ensure that you submit online VAT returns accurately and on time.
Contact us today and find out more about how we can help.
