Value Added Tax (VAT) is what’s known as a type of ‘consumption tax’ – a form of tax applied to eligible goods and services. Fortunately, not all businesses need to register for VAT – only those whose taxable turnover reaches the registration threshold.
When a business reaches this point, there are several ways in which they can register and get set up for VAT. Before we look at the ‘how’ though, let’s first make sure you’re clear on the ‘when’ and the ‘what’.
When does a business need to register for VAT?
Unlike most of the murky waters of navigating tax regulations, knowing when to register for VAT is simple. As soon as your VAT taxable turnover reaches a specified threshold, you must then register your business for VAT through HMRC.
The current threshold for VAT registration is £85,000. So, once your turnover reaches this threshold in a rolling 12-month period, you’ll need to get your business set up for VAT.
How to work out your VAT taxable turnover
VAT taxable turnover is the total of everything you sell which is not exempt from VAT. Typically it’s those goods and services which are considered to be essential which are exempt from VAT. For example, insurance, investments, several medical procedures, and training costs are all commonly exempt from VAT. You’ll still need to record these in your bookkeeping though!
- If you run multiple sole trader businesses, your turnover for VAT registration is the taxable turnover of all those businesses added together. This is because sole traders aren’t legally separate to their business.
- Limited companies are legally separate to their owners, so you’ll only need to use your turnover from the company.
Why do people volunteer to register for VAT?
Some businesses decide to volunteer for VAT registration, even though their VAT taxable turnover is still below the threshold.
This tends to be so that the business:
- Can reclaim VAT, because it regularly pays more VAT on purchases than it would charge on sales (so it could reclaim the difference from HMRC)
- Appears to be larger and more established to customers
- Can pitch for work in a particular sector (for example, some contractors will only work with VAT registered businesses)
What are the consequences of registering for VAT late?
In short, if your taxable turnover is above the £85,000 threshold and you don’t register your business for VAT, you will most likely incur a financial penalty from HMRC.
How much you’ll be fined is on a sliding scale, dictated by how late you are to register, and how much you owe in VAT.
You’ll need to pay back everything you owe, plus a penalty of 5-15% of your VAT debt. All penalties are a minimum of £50.
This will still be the case even if you didn’t charge VAT to your customers at the time the sale was made. Yep, that means that it’s coming out of the business, instead of the customers’ pockets!
However, if a customer is VAT-registered, you can raise a VAT-only invoice and request this from them retrospectively. But you know, it doesn’t exactly make for great customer relationships, which is why it’s so crucial to get all your VAT ducks in line at the right time.
The different ways you can register for VAT
There are three main ways you can register for VAT – it’s really just down to personal preference. Whichever option you choose, you can expect to receive your VAT registration certificate within 30 working days, though it might sometimes take a little while longer.
Register for VAT through an accountant
For most people, this is the favourable option because handing the responsibility over to a professional will make the process significantly faster and much easier.
All you’ll need to do is provide your accountant with relevant information about your business and they’ll get you set up. Registering for VAT in this way will save you a whole lot of time and headaches.
How to register for VAT online
If you’d prefer to register for VAT yourself, you can do so through a simple online process on HMRC’s website. You’ll need:
- Your National Insurance (NI) number or Unique Taxpayer Reference (UTR)
- The company number if it’s an incorporated business
- The relevant bank account details
Sign into your Government Gateway account (or sign up for one) and request VAT services to get started.
Register for VAT via post
Though most businesses complete VAT registration through a simple online process, you can also register by post using a paper form. This information will need to be sent using a VAT1 form.
If any of the following apply to you, then you must apply by post:
- You’re applying for a registration exception
- If you’re joining the Agricultural Flat Rate Scheme
- You need to register multiple business units or divisions under different VAT numbers
Some of these scenarios might require you to provide additional information. You can find guidance around this on HMRC’s website or ask your accountant.
Choosing the right VAT accounting scheme for you
When you register for VAT, you can select a VAT accounting scheme to use, or you can join a different scheme later. There are several options available, though some do have eligibility criteria. As a rough guide, we’ve listed the basics below.
Making Tax Digital for VAT means that you must keep digital records and submit your VAT return electronically.
Standard VAT accounting
You’ll account for the VAT on everything that you buy and sell, and either pay the difference to HMRC (if you collect more from your customers than you pay on the things that you buy), or reclaim it (if it’s the other way round).
Annual accounting scheme
The annual VAT accounting scheme applies the same process as standard VAT accounting but rather than making quarterly VAT submissions, you will submit on a yearly basis. You can then pay any VAT you owe in quarterly increments across the financial year.
Flat Rate Scheme (FRS)
The VAT Flat Rate Scheme (FRS) means that you’ll pay your VAT bill as a percentage of your total turnover, rather than accounting for the VAT you collect and pay. The flat rate that applies to your business depends on the industry you are in, and the rate varies from sector to sector.
When using this scheme, you’ll still need to add VAT onto your sales and collect it from your customers.
The good news is that most people can charge standard VAT (20%) but pay a slightly lower flat rate, and then keep the difference. The downside is that you can’t reclaim any VAT on purchases, so think carefully about what this might mean for your business.
Cash accounting scheme
This scheme means that you can account for VAT on the date that you’re paid by the customer, rather than the date on your invoice. It also works the other way, so you’ll account for VAT based on the day you pay suppliers, not the day they invoice you.
This is particularly beneficial if you deal with customers who are notoriously bad at paying their invoices on time. However, it’s not so great if you buy a significant amount of things on credit as you won’t be able to reclaim the VAT until the transaction is complete.
Reverse charge VAT scheme
This VAT accounting scheme was introduced in 2021 but only applies to those in the construction industry, specifically contractors and sub-contractors.
The VAT reverse charge scheme puts the onus on the customer – rather than the supplier – to account for VAT on labour provision. It is designed to help tackle ‘missing trader’ fraud. Essentially, the customer pays the VAT straight to HMRC, rather than giving it to the supplier to pass along.
What if your VAT taxable turnover falls below the registration threshold after you register?
Business fluctuates, so if it’s a temporary dip then you’re probably best to staying where you are. De-registering and then re-registering is just a lot of extra admin hassle otherwise.
If your turnover drops below the de-registration threshold (£83,000) and you expect it to stay there, you can simply cancel your registration.
Again, this can be done in several different ways: online, via post, or through an accountant. Whichever option you choose, you’ll need to fill out a VAT7 form and ensure it reaches HMRC within 30 days of your ineligibility.
It typically takes about three weeks for your cancellation date to be confirmed but it’s worth noting here that you will still need to complete a VAT Return for the period up to (and inclusive of) this date.
You will also need to cancel your VAT registration if you cease to produce VAT-taxable goods or services, or if your business stops trading entirely.
If your business continues to trade in VAT-taxable goods or services, you will need to re-register for VAT if your turnover exceeds the £85,000 threshold again.
Advice on how to manage your VAT Return
Hire a qualified accountant
VAT can be complex, so no matter how confident you feel it’s always useful to have a little back up. An accountant will help ensure you always stay VAT compliant, including hitting those deadlines for reporting and paying.
They’ll also be good at advising you which scheme is most beneficial for your business, helping you to protect cash flow and keep you on the right side of HMRC.
Practice good bookkeeping habits
OK, so we really like good bookkeeping, it’s our job – it’s also the best way to keep yourself on track. Use comprehensive bookkeeping software that will enable you to automate and streamline the most arduous processes. That way, you’ll stay organised throughout the year – something that is particularly vital if need to register for VAT.