Study tips: when is a business required to register for VAT?

Failure to register for VAT at the correct time can incur heavy penalties for business owners. Samantha Wishart, accounting tutor at AVADO, talks us through how to calculate VAT for business. 

The amount of the penalty will depend on the amount of VAT due and how late HMRC were notified. In some cases, this could be as high as 15% of the VAT due.

A business must register for VAT within 30 days if its taxable turnover in a rolling 12-month period exceeds the registration threshold. This isn’t a fixed period like the tax year or the calendar year and does not bear any relationship to the business accounting year- it could be any period, for example the start of August to the end of July.

If a business expects its taxable turnover in the next 30 days alone to exceed the registration threshold it must register without delay.

A business which has trading that temporarily takes it above the VAT registration threshold but which expects turnover to drop back below the deregistration threshold in the next 12 months can apply to stay unregistered. The business must write to HMRC with evidence that the momentary increase is a true one-off occurrence for example an exceptional sale or temporary contract.

Example (using the FA 2017 registration threshold of £85,000):

Sales of goods and services in the UK are classified as either being subject to VAT, VAT exempt or outside the scope of VAT. Vatable items are subject to VAT at standard, reduced or zero rate and will need to be included when calculating VAT taxable turnover.

VAT taxable turnover is the total of everything sold that isn’t VAT exempt. Items that are exempt from VAT include insurance, health and dental services; supplies of these items can be ignored for the purpose of calculating VAT taxable turnover as can those items that are “outside the scope of VAT”.

Remember, at this stage, the business is not registered for VAT so their turnover will not include VAT.

Example (using the FA 2017 registration threshold of £85,000):

ABC Ltd is not yet registered for VAT. In the previous 12 months, the business has made the following sales. What is the taxable turnover and what action should the business take with regards to registration?

Solution: The taxable turnover of the business is £52,500 + £21,000 = £73,500. ABC Ltd do not have to register for VAT just yet but should continue to monitor their turnover.

Registration thresholds change on 1 April each year; businesses can check the current thresholds in force on the GOV website. If a business registers late, it must pay what it owes from when it should have registered. It may also receive a penalty depending on how much is owed and how late the registration is.

Example:

A business failed to register with HMRC when it reached the registration threshold 6 months ago. Since then they have made £72,000 of sales. How much will the business owe to HMRC? This will really depend on whether they think their customers will be amenable to paying more than they have already been charged; if so, they can add VAT on top of what has already been charged. If not, they may decide to treat the invoices as VAT inclusive and absorb the VAT which should have been charged.

Option 1: £72,000 x 20% = £14,400

Option 2: £72,000/6 = £12,000

(In addition to the above, the business may also incur a penalty)

Deregistration

A business will be required to cancel its registration if it ceases to make taxable supplies. If taxable supplies fall below the deregistration threshold, perhaps as a result of closing down a part of the business or because opening times have reduced, the business may apply for voluntary deregistration.

Care should be taken when calculating VAT taxable turnover; particularly if the business supplies a mix of standard and zero-rated items.

Example (using the FA 2017 de-registration threshold of £83,000):

Business owners should consider the implication of deregistration. Deregistration may be beneficial if the majority of sales are made to customers who are not VAT registered; they will not be able to reclaim input tax, making your prices less competitive than non-registered competitors. Deregistration may also be of benefit where a significant proportion of inputs are reduced or zero-rated meaning that the business can only reclaim a relatively small amount against outputs. Finally, there may be time and cost savings through not having to keep VAT records or prepare VAT returns.

Deregistration may not be appropriate where the business regularly reclaims VAT from HMRC because their inputs are greater than their outputs or where most of their customers are VAT registered.

Businesses will also have to bear in mind there may still be VAT that needs to be accounted for and paid to HMRC on deregistration.

The business must also notify HMRC of the following changes within 30 days.

  • Change in the trading name.
  • Change of address of the business.
  • A change in main business activities (particularly if this affects the types of supply).
  • Changes to the business bank account details.

Read information on VAT registration, voluntary registration and deregistration provided by HMRC, along with the current rates and thresholds.

Browse the full range of AAT study support resources here

Samantha Wishart is an Accounting Tutor with AVADO.

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