Once your business is turning over £85,000 or more, the law dictates you need to be registered for VAT with Her Majesty’s Revenue and Customs (HMRC).
The process of registering for VAT can pose many questions and become quite technical, so we’ve put everything you need to know in layman’s terms to make life a little easier and answer all those burning questions.
What is VAT?
Value added tax (VAT) is a consumption tax that applies to many goods and services bought, sold, and consumed in the European Union (EU). As of January 2011, the VAT rate has been set at 20% in the UK, which must be added on top of the cost of goods and services the rate applies to.
Certain things services and products are exempt from VAT, including financial and property transactions.
How do I work out if I need to be VAT registered?
If you think you might be over the threshold for being VAT registered in any 12-month period, you can work this out by adding together all your UK sales that are applicable for VAT.
This includes:
- Goods you gave out as gifts, bartered for or part-exchanged.
- Goods you loaned or hired to customers/clients.
- Any business goods you used for personal reasons.
- Building work for your business that exceeds £100,000.
The advantages of being VAT registered
While some may see VAT as something of a headache, there are benefits attached to being VAT registered:
- Many businesses and consumers will only deal with companies that are VAT registered.
- Being VAT registered can give your business a certain amount of credibility as well as the perception that you’re bigger and better established – especially in cases of smaller businesses who have registered despite being below the threshold.
- As a VAT registered business, you are eligible to claim back the tax you have been charged when buying goods for your company. This could include equipment such as tablets and smartphones, as well as hotel and travel expenses, or anything else eligible for VAT.
When should I register?
VAT is compulsory when your annual turnover reaches the £85,000 threshold, though you might want to consider applying for voluntary VAT registration some time before you hit this milestone. This is because your annual turnover is calculated on a rolling basis at the end of each month, and the registration process can take several weeks. You don’t want to fall foul of the rules.
It’s not uncommon for businesses to miss the threshold until the end of a financial quarter arrives, by which time it’s too late. Worse still, there are plenty of cases where firms have not addressed the matter until the end of the financial year while completing their income tax return.
You should get into the habit of checking your balance sheets on a regular basis.
What happens if I don’t register?
Whether you’ve missed registration through genuine error, or chose to ignore it, you will be liable to a penalty which is calculated as a percentage of the VAT you owe. The percentage you pay increases the longer you leave it:
- 5% charged on amount owed if there’s a delay of up to nine months between when you hit the threshold and when you registered with HMRC.
- 10% charged on amount owed when the delay is up to 18 months.
- 15% charged on amount owed when delay is over 18 months.
VAT: Your responsibilities
Before signing up for VAT, be aware of your responsibilities as a VAT registered business. As well as being expected to keep VAT records and pay any VAT, you need to:
Charge your customers the right amount of VAT
There are three rates of VAT: standard rate, reduced rate, and zero rate.
- Standard rate is 20% and applies to anything you sell below the distance threshold to non-VAT registered EU customers. If you go above the distance threshold, you must register for VAT in that particular country.
- Reduced rate can apply to items such as domestic fuel and power and children’s car seats, which all are all charged at 5%. The same applies to mobility aids for those over 60 in cases where the items in question are installed in their home.
- Zero rate applies to goods that are VAT taxable, but that comes with a 0% charge to your customers. This includes books and newspapers, children’s clothes and shoes, and the majority of good exported to non-EU countries. It’s important that these items are still logged in your VAT accounts and VAT return.
Submitting VAT returns
VAT returns must be submitted to HMRC every financial quarter and can be done online. It needs to include the total amount of VAT charged to customers, as well as:
- All the invoices you’ve received that quarter, whether they have been paid or not. Even in cases where you are not expecting payment for 30 days or more.
- Details of the VAT you’d like to claim back on any purchases you’ve made for your business, which can include tablets, phones, or any items of stock.
How to register for VAT
The majority of businesses can register online. As well as registering for VAT, this automatically creates your VAT online account, which you may see referred to as a ‘Government Gateway account.’ This is where you will submit your VAT returns to HMRC going forward. If you’ve enlisted the services of an accountant to look after your business financials, you can grant them permission to do so on your behalf.
There are times where applying online isn’t possible. If you want to apply for ‘registration exception’ (this would be if you believe your business is only due to exceed the VAT threshold temporarily), you’re joining the Agricultural Flat Rate Scheme, or are registering divisions of a business that require separate VAT numbers. Then you’ll need to apply via post using a VAT1 form.
Receiving your certificate: What to do next
Once you’ve applied online, you should receive your VAT registration certificate within approximately 14 working days via your VAT online account. If you registered using an agent or were exempt from applying online, you’ll receive this in the post.
Once you have it, be prepared to provide details such as your annual turnover and information on your business activity, as well as your bank details. It’s also worth noting that during the registration period, you cannot charge or display VAT on your invoices – this can only be done once you have received your VAT number.
Registering for VAT in other EU countries
If your business supplies digital services to customers based in other parts of the EU, you need to either register for VAT in each country you supply to, or sign-up for the VAT MOSS service.
Services which fall under the digital umbrella include telecommunication, broadcasting, video on demand, downloadable software, games, music, apps and eBooks.
When to begin charging for VAT
You need to begin charging customers VAT from the date you register, not the day you receive your certificate. While waiting for your certificate, you should produce all your invoices and check they include both the sale amount and the VAT amount.
Once you’re fully-registered and have your VAT number, you need to add this to all invoices issued during this interim period and send the new version to your customers. They can then put in a claim for any VAT charged.
What about purchases made before registration?
You can claim back VAT on purchases made before registration, but there is a time limit of six months for services and four years for goods still in your possession (even if they were used to make goods still you still have).
Any VAT claims must be related to your business purpose and be linked to the VAT taxable goods or services that you supply to consumers. Such claims can be made on your first VAT return, and you must keep records of any invoices and receipts, as well as purchase dates and a description of the items and how they relate to your business.
Informing HMRC of changes to your business
It is your responsibility to keep your VAT registration details up to date, which you can do both via your online account or by post using a VAT484 form.
To avoid a financial penalty, you should inform HMRC within 30 days if you change any of these:
- Business name, trading name or main business address.
- Any members of a partnership, or the names or home addresses of any business partners.
- The accountant/agent who deals with your VAT.
If your bank details change, then HMRC should be informed within at least 14 days. If you pay VAT via Direct Debit, then your bank should know within five working days before or after your VAT payment is due.
If you have taken on the VAT responsibilities of someone who has died or is ill, you must tell HMRC within 21 days by sending a VAT484 form.
Cancelling VAT registration
If you cease to trade and have stopped producing VAT taxable goods, then you are no longer eligible to be VAT registered and must cancel your membership online within 30 days to avoid being charged a penalty.
You must also cancel if you happen to join a VAT group. You can apply to be de-registered if your VAT taxable turnover falls below the de-registration threshold, which is currently set at £83,000 .
Transferring VAT registration
VAT registration can be transferred from one company to another in order to keep using the same VAT number. Transfers can be done by post using a VAT68 form or online via your account. Typically, it will take HMRC around three weeks to confirm the transfer.
As you can see, being VAT registered comes with a lot of responsibility. Keeping all your records up to date and offering complete transparency with HMRC should ensure problems are kept to the minimum. Simple as that. Just like our merchant services.