Do I need to be VAT registered?

Some businesses choose to register for VAT voluntarily and there can be sound commercial or financial reasons for doing this.  Others prefer to wait until their turnover reaches the HMRC registration threshold.

Business owners, whether sole traders, partners or company directors, are responsible for monitoring when their turnover is likely to reach that threshold set at £77,000 for 2012-13.

This looks like it should be a relatively simple exercise but,

  • What sales should be included?
  • £77,000 over what period of time?
  • What if you have more than one business?

Sales that constitute “taxable supplies” need to be included i.e. everything that is not exempt or outside the scope of VAT.  The classification of between the different rates of VAT is set out in VAT legislation but is not always straightforward.    If a business purchases goods, known as “acquisitions”, from EU member states there are special rules about accounting for VAT which can mean that the registration threshold could be reached without the business itself making the taxable supplies.  Similar rules exist for services which are known as “reverse charges”.  Other peculiarities such as deemed and self supplies also contribute to the amounts which must be included when reviewing the VAT registration threshold.

Businesses need to look forwards AND backwards when considering the threshold and review their revenue on a rolling 12 month basis rather than by accounting periods or tax years.  This review will also affect the date from which the business needs to be registered which HMRC will use as a starting point for penalties, surcharges and interest for late registration and other errors.

If the owner has more than one business, HMRC will generally consider them as one for the purpose of deciding if the turnover threshold has been reached, regardless of how different the nature of each trade is.  It is not possible to split trade across different legal entities to keep each one below the threshold.

HMRC are likely to charge financial penalties where a business fails to register at the right time, charges the wrong amount of VAT, gets the tax point wrong, or fails to keep the correct accounting records.  In addition it is the business that is liable for paying the VAT over to HMRC not the customer.

For example, where a business is late registering VAT law deems that all invoices raised after the date on which registration should have taken place are inclusive of VAT.    Some customers may accept a replacement invoice but not all, especially those who are not VAT-registered themselves.

Standard rated supplies made after date on which registration should have taken place£120,000
Deemed VAT payable to HMRC£20,000
Business keeps£100,000

VAT is probably the tax that we all come across most often in everyday life but it is far from simple for businesses.  There is a financial cost to the business of getting it wrong and a personal cost to business owners in terms of worry and time.  Prevention is definitely better than cure.  Act now and speak to Composure about getting your VAT straight. [Hyperlink to contact form]

Related topics

VAT rates, taxable supplies, standard rate, reduced rate, zero rate, exempt, outside the scope, imports, exports, acquisitions, dispatches, reverse charges, place of supply, bad debt relief, partial exemption, deregistration, deemed supplies, self-supplies, VAT schemes, record-keeping, returns, penalties, surcharges, interest, HMRC, VAT account, tax point.

About the Author
Carolyn Burchell trained with the UK’s top firm of accountants, qualifying as a Chartered Accountant in 1996. Carolyn moved into industry in 1997 working on a number of commercial projects and managing Treasury and Credit functions before taking a career break to have a family. In 2009, Carolyn decided to enter into the stringent Chartered Institute of Taxation examination programme, qualifying as a Chartered Tax Adviser in 2012.

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