Should I Register for VAT? A Clear Guide on VAT Registration

If you’re a business owner in the UK, you may be wondering whether you should register for Value Added Tax (VAT). VAT is a tax on the value added to goods and services throughout the supply chain. If you’re a VAT-registered business, you’ll need to charge VAT on your sales, and you’ll be able to claim back any VAT you pay on your purchases.

Registering for VAT is mandatory for businesses whose taxable turnover exceeds a certain threshold. As of March 2024, this threshold is £85,000. If your taxable turnover exceeds this amount, you’ll need to register for VAT with HM Revenue and Customs (HMRC) within 30 days. However, even if your turnover is below the threshold, you can still choose to register for VAT voluntarily.

Understanding VAT

Grasping the concept of VAT is fundamental for UK business owners. VAT applies at various stages of production and distribution, ultimately borne by the end consumer. As a VAT collector for HMRC, businesses play a crucial role. The standard VAT rate is 20%, but there are reduced rates and exemptions for specific goods and services. To deepen your understanding, particularly how it affects sole traders, consider exploring our Sole Trader Accounting services, which include detailed explanations and support.

What Is VAT?

VAT is a tax on the value added to goods and services at each stage of production and distribution. It is a tax that is ultimately borne by the end consumer. As a business owner, you act as a VAT collector for HM Revenue & Customs (HMRC) on behalf of the government.

The standard rate of VAT in the UK is currently 20%. However, some goods and services are subject to reduced-rate supplies, VAT-exempt, or zero-rated VAT.

VAT Rates and Schemes

When registering for VAT, you’re assigned a scheme dictating your VAT reporting and payment schedules. Options include the standard scheme, the Flat Rate Scheme, and the Annual Accounting Scheme. Each has its nuances, influencing how you manage VAT payments and submissions to HMRC. For businesses seeking clarity on selecting the appropriate scheme, our VAT Accountants Guide offers invaluable insights.

The standard VAT scheme requires you to submit VAT returns and pay VAT to HMRC every quarter. The flat rate VAT scheme is a simplified scheme that allows you to pay a fixed percentage of your VAT-inclusive turnover to HMRC. The annual accounting VAT scheme allows you to submit one VAT return and make one annual VAT payment to HMRC.

Exempt vs Zero-Rated Supplies

Some goods and services are exempt from VAT, while others are zero-rated. Exempt supplies are not subject to VAT, and you cannot reclaim VAT on purchases related to exempt supplies. Zero-rated supplies are subject to VAT at a rate of 0%, and you can reclaim VAT on purchases related to zero-rated supplies.

VAT Registration

If you are running a business in the UK, you may be wondering whether you should register for VAT. This section will explain what VAT registration is, when it is mandatory, when it is voluntary, and how to register for VAT.

Mandatory VAT Registration

Businesses exceeding a £85,000 taxable turnover must register for VAT, but why wait? Voluntary registration, even below this threshold, can provide significant advantages, from reclaiming VAT on purchases to enhancing business credibility. Whether mandatory or voluntary, registration marks a critical step in your business journey. Our Limited Company Accountants page offers tailored advice, especially for businesses navigating their VAT obligations for the first time.

Voluntary VAT Registration

If your business’s VAT taxable turnover is below £85,000, you can still register for VAT voluntarily. There are several reasons why you might want to do this. For example, if most of your customers are VAT registered businesses, they will be able to claim back the VAT you charge them. Additionally, registering for VAT can make your business appear more professional and credible. However, there are also downsides to voluntary registration, such as the additional administrative burden and the need to charge VAT on your sales.

How to Register for VAT

To register for VAT, you need to complete an online application form on the HMRC website. You will need to provide information about your business, such as its name, address, and VAT taxable turnover. You will also need to choose a VAT accounting scheme, which determines how you calculate and pay VAT. There are several different schemes available, such as the standard method, the flat rate scheme, and the cash accounting scheme.

Calculating Taxable Turnover

When deciding whether to register for VAT, you need to consider whether your taxable turnover exceeds the VAT registration threshold, which is currently £85,000 per annum. To determine your taxable turnover, you need to understand what it includes and excludes.

Defining Taxable Turnover

Taxable turnover is the total value of goods and services that you supply that are subject to VAT. It includes the value of any goods and services that you supply within the UK that are not exempt from VAT, as well as any goods and services that you supply to customers in other EU countries.

VAT Taxable Turnover

VAT taxable turnover is the total value of taxable supplies that you make in the UK that are not exempt from VAT. This includes the value of any goods and services that you supply within the UK that are not exempt from VAT, but excludes the value of any goods and services that you supply to customers in other EU countries.

To calculate your VAT taxable turnover, you need to add up the value of all the goods and services that you have supplied that are subject to VAT, and then subtract any VAT that you have charged your customers.

Deregistration Threshold

If your taxable turnover falls below the deregistration threshold, you may be able to deregister for VAT. The current deregistration threshold is £83,000 per annum. If you choose to deregister, you will need to notify HM Revenue and Customs (HMRC) and you will no longer be required to charge VAT on your supplies.

It is important to note that if you deregister for VAT, you will not be able to reclaim any VAT that you have incurred on your business expenses, unless you are still VAT registered at the time that you incur the expense.

VAT Accounting Schemes

If you are registered for VAT, you can choose from a range of VAT accounting schemes that are designed to simplify your VAT accounting and reporting obligations. In this section, we will describe the three most commonly used VAT accounting schemes in the UK.

Cash Accounting Scheme

If you are a small business, you may find it difficult to manage your cash flow if you have to pay VAT on your sales before you have received payment from your customers. The Cash Accounting Scheme is designed to help you manage your cash flow by allowing you to account for VAT on the basis of your cash receipts and payments.

Under this scheme, you only have to pay VAT to HMRC when you have been paid by your customers. Similarly, you can reclaim VAT on your purchases only when you have paid your suppliers. This means you do not have to pay VAT on your sales until you have received payment from your customers, and you do not have to pay VAT on your purchases until you have paid your suppliers.

Annual Accounting Scheme

The Annual Accounting Scheme is designed to simplify your VAT accounting and reporting obligations by allowing you to submit only one VAT return per year. This scheme is available to businesses with a turnover of up to £1.35 million per year.

Under this scheme, you make advance VAT payments towards your VAT bill based on your last return (or estimated if you’re new to VAT). You submit one VAT return a year and pay any outstanding VAT due or receive a refund of any overpaid VAT. This scheme can help you manage your cash flow and reduce your administrative burden.

Flat Rate Scheme

The Flat Rate Scheme is a simplified VAT accounting scheme that is available to businesses with a turnover of up to £150,000 per year. Under this scheme, you pay a fixed percentage of your gross turnover as VAT to HMRC. The percentage you pay depends on the type of business you run, and it is lower than the standard VAT rate.

This scheme is designed to simplify your VAT accounting and reporting obligations by reducing the amount of record-keeping you have to do. You do not have to record the VAT you charge on your sales or the VAT you pay on your purchases. Instead, you simply pay a fixed percentage of your gross turnover as VAT to HMRC.

Managing VAT Returns and Payments

When you register for VAT, you will need to file VAT returns and make payments to HMRC. Here’s what you need to know about managing your VAT returns and payments.

Filing VAT Returns

As a VAT-registered business, you will need to file VAT returns on a regular basis, usually every three months. The VAT return shows the amount of VAT you have charged on your sales (output tax) and the amount of VAT you have paid on your purchases (input tax). You will need to calculate the difference between the two and pay the balance to HMRC, or claim a refund if you have overpaid.

To file your VAT return, you can use HMRC’s online service or compatible software. You will need to include your VAT invoices and receipts, as well as any adjustments for bad debts, discounts, and other items.

Paying VAT

When you file your VAT return, you will need to pay any VAT due to HMRC. You can pay online, by direct debit, or by bank transfer. You will need to make sure you pay on time to avoid penalties and interest charges.

If you have a VAT refund due, HMRC will pay it directly to your bank account, usually within 10 working days of receiving your VAT return.

Claiming VAT Back

If you have paid more VAT on your purchases than you have charged on your sales, you can claim the difference back from HMRC. This is known as claiming VAT back or reclaiming input tax.

To claim VAT back, you will need to include the input tax on your VAT return and provide evidence of your VAT invoices and receipts. You can claim VAT back on most goods and services used for your business, including equipment, supplies, and overheads.

Record Keeping and Compliance

If you register for VAT, you will need to keep accurate records of all your business transactions. Proper record keeping is essential to comply with HM Revenue and Customs (HMRC) rules and regulations. Here are some important aspects of VAT record keeping and compliance:

VAT Record Keeping

As a VAT registered business, you must keep records of all your sales and purchases. You must also keep records of the VAT you charge and the VAT you pay. These records must be accurate, complete and up-to-date. You should keep records of:

• Sales and purchases
• VAT invoices
• VAT receipts
• Credit notes
• Import and export documents
• VAT account records

You must keep these records for at least six years. You can keep them on paper or electronically. If you keep electronic records, you must make sure they are secure and cannot be altered.

Making Tax Digital (MTD) for VAT

With Making Tax Digital (MTD) for VAT, digital record-keeping and VAT submission through compatible software became mandatory for most businesses in April 2019. This shift aims to simplify VAT management and reduce errors. For businesses adapting to MTD, our Xero Accountants service provides expert support, ensuring compliance and streamlining your VAT processes.

MTD for VAT aims to make it easier for businesses to get their VAT right and reduce errors. It also aims to make the VAT system more efficient and effective.

VAT Compliance Checks

If you are a VAT registered business, you may be subject to compliance checks by HMRC. Compliance checks are designed to ensure that you are keeping accurate records and complying with VAT rules and regulations.

HMRC may carry out compliance checks by phone, post or by visiting your premises. They may ask to see your VAT records and other business records. They may also ask you questions about your business and the VAT you charge and pay.

It is important to keep accurate records and comply with VAT rules and regulations to avoid penalties and interest charges. If you need help with VAT record keeping or compliance, you should seek advice from a qualified accountant or tax adviser.

Special Considerations

If you are considering whether or not to register for VAT, there are several special considerations that you should take into account. In this section, we will outline some of the most important factors to consider when deciding whether or not to register for VAT.

VAT for Digital Services

If you are providing digital services to customers in other EU countries, you may be required to register for VAT in those countries. This is due to the introduction of new rules in 2015 that require businesses to pay VAT on digital services in the country where the customer is located. If you are unsure whether or not you need to register for VAT in another EU country, you should seek advice from a tax professional.

VAT for Non-Established Taxable Persons

If you are a non-established taxable person, which means that you do not have a permanent establishment in the UK, you may be required to register for VAT if you make taxable supplies in the UK. This includes supplies of goods and services, as well as imports into the UK. You should seek advice from a tax professional if you are unsure whether or not you need to register for VAT as a non-established taxable person.

VAT Representatives and MOSS

If you are a non-EU business that is registered for VAT in the EU, you may be required to appoint a VAT representative in the UK if you make taxable supplies in the UK. Additionally, if you are a business that supplies digital services to customers in the EU, you may be required to register for the VAT Mini One Stop Shop (MOSS) scheme. This scheme allows you to declare and pay VAT on all your EU sales in one Member State. You should seek advice from a tax professional if you are unsure whether or not you need to appoint a VAT representative or register for MOSS.

Northern Ireland Protocol

If you are a business that operates in Northern Ireland, you may be subject to different VAT rules than businesses in the rest of the UK. This is due to the Northern Ireland Protocol, which came into effect on 1 January 2021. If you are unsure how the Northern Ireland Protocol affects your business, you should seek advice from a tax professional.

Penalties and Fines

When it comes to VAT, there are penalties and fines that you should be aware of. Here’s what you need to know:

Late Registration Penalties

If you’re required to register for VAT and you don’t do so on time, you may face late registration penalties. The penalty amount is based on how late you are in registering, and it increases the longer you wait. According to GOV.UK, the penalty rates are as follows:

• Not more than 9 months late: 5% of what you owe
• More than 9 months but not more than 18 months late: 10% of what you owe
• More than 18 months late: 15% of what you owe

There is also a minimum penalty of £50. It’s important to register for VAT on time to avoid these penalties.

Non-Compliance Fines

If you’re registered for VAT, there are several reasons why you may receive a non-compliance fine. Here are some examples:

• Late submission of VAT returns
• Late payment of VAT
• Errors on VAT returns
• Failure to notify HMRC of changes to your business, such as a change of address or cessation of trading

According to GOV.UK, the amount of the non-compliance fine depends on the severity of the offence. For example:

• Late submission of VAT returns: £100 for the first offence, £200 for the second offence, and £400 for subsequent offences within a 12-month period
• Late payment of VAT: a percentage of the unpaid VAT that increases the longer you take to pay
• Errors on VAT returns: a percentage of the unpaid VAT that results from the error
• Failure to notify HMRC of changes to your business: a penalty of up to £3,000

Business Considerations

If you are considering registering for VAT, there are several business considerations you should take into account. VAT registration can have an impact on your prices, clients, admin, and business expenses. In this section, we will discuss these considerations in detail.

Impact on Prices and Clients

VAT registration can have an impact on your prices and clients. If you are a service provider, you will need to add VAT to your prices. This can make your prices less competitive, especially if your competitors are not VAT registered. Additionally, if you have VAT-registered customers, they will expect you to provide them with a VAT invoice. This can add an extra layer of admin to your business.

VAT for Different Business Structures

The impact of VAT registration can vary depending on your business structure. If you are a limited company, you will need to register for VAT if your taxable turnover is over £85,000. If you are a sole trader or in a partnership, you are not required to register for VAT unless your taxable turnover exceeds the threshold. However, if you are a sole trader or in a partnership, registering for VAT can make your business look more professional to clients.

Admin and Business Expenses

VAT registration can also impact your admin and business expenses. You will need to keep track of your VAT invoices and receipts, and submit a VAT return to HMRC every quarter. This can add an extra layer of admin to your business. Additionally, you may need to purchase machinery or software to help you manage your VAT. These expenses can add up over time, so it’s important to factor them into your budget.