Knowing whether you need to register for VAT, and how it all works, can be daunting. It’s important to understand that registering for VAT is based on your business’s turnover, not on what type of business it is. So, whether you’re an individual sole trader, a limited company, something else or just starting out, we’ve put together a quick guide to help.
First off, what is VAT?
VAT is a tax known as a ‘consumption tax’, which means that it’s applied at the point when goods, services, or other taxable supplies are purchased.
VAT registered businesses effectively act as a tax collector on behalf of HMRC. They charge VAT on the taxable sales that they make, and then pay the VAT that they collect on to HMRC by completing a VAT return. For this reason, it’s sometimes known as an ‘indirect tax’.
What are the current VAT rates?
There are currently three rates of VAT in the UK:
|VAT Type||VAT Rate||What it applies to|
|Standard rate||20%||Most goods and services|
|Reduced rate||5%||Some goods and services, e.g., home energy and children’s car seats|
|Zero rate||0%||Zero-rated goods and services, e.g., most food and children’s clothes. Zero-rate and VAT exempt are different things!|
Who must register for VAT?
As soon as your overall takings (known as turnover) of VAT taxable sales for the previous 12-month period reaches £85,000, then you must register for VAT. This excludes sales which are ‘outside the scope of VAT’, which means that VAT isn’t chargeable on them. You should also apply for VAT registration if your 12-month turnover is likely to exceed the threshold within the next 30 days.
However, some small businesses decide not to wait until they’ve hit the £85,000 threshold and actually sign up for VAT voluntarily.
Why would they register for VAT voluntarily?
A big advantage of volunteering to register for VAT is that the business is then able to reclaim VAT on any purchases it makes. This is because:
- A business which charges more VAT on sales than it pays on purchases has to pay the difference to HMRC.
- But a business which pays more VAT on its purchases that it collects from sales can claim the difference back from HMRC.
If your business regularly pays more VAT on it’s purchases than it collects through sales (for example, if the goods and products you sell are exempt from VAT), then registering voluntarily can be very tax efficient, because you’ll be able to claim back the VAT that you pay!
Voluntary VAT registration is also useful if you want to make your business look larger or more stable, because it suggests that you’ve already reached the registration threshold. In some cases, such as bidding for contracts, you might even find that it’s a requirement.
It also means that you’re already set up and registered should your business grow quickly, and you surpass the £85,000 threshold – so no worries about late fines!
The type of VAT which you register for will also have an impact on your bookkeeping and accounting processes, but by registering early, you won’t need to make these changes at a later date.
The key takeaway message here though is that even when you’re not VAT registered, it’s essential that you keep a close eye on your turnover! As soon as that magic number looms, you’ll need to let HMRC know ASAP.
Is the VAT threshold for sole traders different to limited companies?
No. Regardless of whether you’re a sole trader operating alone, or you’re a large company with multiple sites, the registration threshold is the same. As soon as your turnover from the last 12 months reaches £85,000, or you expect to reach it in the next 30 days, you must register for VAT.
How do I calculate my taxable turnover?
Calculating your taxable turnover is actually fairly simple, as long as you keep good financial records. Forgetting VAT for a moment, this is well worth doing anyway. It’s always a good idea to keep tabs on the financial health of your business!
You should also be able to use your figures to plan ahead, and see if you reasonably expect to reach the threshold within the next 30 days.
Note: A sole trader, with multiple sole trader businesses, must use the total taxable turnover of all their businesses. This is because a sole trader isn’t legally separate from their business. A limited company is separate, so even if you have multiple companies, as long as they’re doing different types of trade then you only need to consider one company at a time.
What should be included in taxable turnover?
HMRC are quite clear about what you should include when working out the taxable turnover of a business, such as goods and services which you sell, loan, or hire to customers. They publish a full list in their guide to calculating VAT turnover.
How do I register for VAT?
There are a few ways you can register for VAT. The majority of businesses register online through the HMRC website using their Government Gateway login. You can also ask your accountant to register your business for you, submitting your returns and dealing with HMRC on your behalf.
It’s also possible to register for VAT via post, using form VAT1. However, once you sign up successfully, HMRC will expect you to submit your VAT returns and payments electronically. This means that once you’ve received your certificate of registration, you’ll need to sign up for VAT Online Services with HMRC online.
Again, don’t forget that you’ll need to use software that’s compliant with Making Tax Digital.
What happens after I apply for VAT registration?
Once you complete the VAT registration process, HMRC will issue you with a VAT number, and confirm the due date of your first VAT return. You’ll need to include your VAT number on all your invoices.
Don’t forget that VAT-registered businesses whose turnover is above the threshold now need to follow Making Tax Digital (MTD) rules for VAT. This becomes mandatory for all VAT registered businesses from the first VAT period starting on or after 1st April 2022. So, get that MTD software bedded in early!
Can I apply for a VAT registration exception?
Yes, potentially. Even if your turnover exceeds £85,000, and you’re obliged to register, you can apply for VAT registration exemption if you strongly believe it will only be temporary. For example, this may be because you’ve had a one-off bumper year, but you don’t expect it to continue. If your application is successful, you won’t need to register for VAT.
To apply for exemption, you need to explain your circumstances in writing to HMRC and provide documentary evidence to back up your case. As part of this, you must give good reasons behind your request. For instance you should:
- Be able to show why crossing the VAT threshold is a one-off event for your business; and
- Explain why there is no reason to believe the threshold will be crossed in the foreseeable future.
Whether you’ve already crossed the £85,000 VAT threshold or you’re planning ahead, fire up a free trial of our MTD for VAT approved software. No payment details necessary.