Getting your head around VAT registration is about as joy-inducing as a trip to the dentist. There’s a lot to consider, and even more to understand.
Whether you’re a self-employed sole trader, part of a partnership or the owner of a limited company, you’ll need to register and account for Value Added Tax (VAT) once your turnover exceeds the VAT threshold.
Once you’re registered, you must charge the standard VAT rate to all your sales. You’ll need to pay VAT on goods and services bought from other businesses, and complete a VAT return. Returns are completed quarterly, monthly or annually, with quarterly being the most common.
Navigating the nuances of VAT registration and remembering to submit your returns on time every quarter can be a serious headache. That’s why it’s so important to enlist the support of a trusted chartered accountant who can take that quarterly stress off your plate.
Here are the 10 most frequently asked questions about VAT registration:
#1. What’s the VAT registration threshold?
Currently, the VAT taxable turnover is £85,000 and it will stay this way until at least April 2022. If your business made more than that in the last rolling 12-month period, you’ll need to register and pay VAT. You’ll also be required to be part of the Making Tax Digital initiative and submit all your VAT returns online via software.
#2. Should I register for VAT even if my sales are below that figure?
It’s not compulsory, but you can voluntarily register for VAT. Being VAT registered can give your business more credibility, and if you provide services, it can also allow you to take advantage of the flat-rate VAT scheme.
For example, if you’re a contractor with low outgoings and you provide services to larger VAT-registered companies and agencies, you could benefit financially from the flat rate scheme. If you provide goods and services to smaller businesses who can’t reclaim the VAT, though, you could end up needlessly increasing your prices.
#3. Does everything get taxed?
Not necessarily. There are some services that are classed as ‘zero rated’ or ‘exempt’ from VAT, like education and some types of learning resources. For a number of consumer goods, like electricity and energy-saving products, the VAT rate is reduced to 5%. Basically, if you only sell goods or services that are deemed exempt, you won’t need to be VAT registered.
#4. What can I claim back from VAT?
You can usually claim back the VAT paid on all the tax deductible goods and services you’ve purchased in your business. This includes things like travel and hotel costs, marketing activities, professional services, IT equipment, business premises rent, and any items you’ve bought as stock. You must keep the VAT invoice from any suppliers to be able to claim the VAT paid back.
If you’ve bought anything for personal use, though, you can only reclaim the business portion of the VAT. For example, if you use your mobile phone for business and personal calls, you’ll only be able to claim a percentage of the VAT on the purchase price of your handset, and your service plan.
#5. Can I split my business to stay under the threshold?
Sadly, no. If both businesses are performing the same trade and services, then HMRC will view them as connected and you’ll need to consider the joint turnover to calculate whether you’ve reached the VAT threshold.
#6. Could I just delay invoicing a customer until the new financial year?
No, because the VAT threshold is based on a rolling 12 months – not your financial year. If your business year-end is 31st March, for example, and in that period you’ve made £83,000, you may still need to register for VAT if your turnover in the first two months of the next year pushed you over the threshold.
#7. What if I lose customers when I increase my prices by 20%?
If you want to grow your business, registering for VAT is inevitable. You can plan ahead by registering at the beginning before hitting the threshold, or by steadily increasing your prices as you grow so that you’ll have already built in that extra 20%.
By doing that, you’ll get a temporary benefit from the price increase, but remember that this will become the VAT inclusive price once you’re VAT registered. It’s also worth noting that if your customers are also VAT-registered, they can claim back the VAT they’ve paid to you, so they won’t ultimately pay more.
#8. So how do I actually register for VAT?
You can register yourself online on the HMRC website or ask an accountant to help you navigate the right options and registration. After that, you can either process and manage your VAT returns yourself (never advisable!) or you can appoint an accountant to manage this and liaise with HMRC on your behalf.
If you’re applying for a ‘registration exception’, registering different divisions of a business under one umbrella company for separate VAT numbers, or you’re joining the Agricultural Flat Rate Scheme, however, you must register by post using VAT1.
Once you’re registered, you’ll need to let your customers know and adjust your prices accordingly. Your VAT return will be due one month and seven days after your quarter-end (e.g. 7 June if your quarter ends on 30 April).
#9. What do I put on a VAT invoice?
VAT invoices need to show much more than typical invoices. As well as your VAT registration number, you’ll need to include your trading name and address, unique invoice number following on from the previous invoice, the invoice data and your customer’s address.
You’ll also need a description of the goods and services you supplied, including the quantity of goods or extent of services, unit price and total amount payable excluding VAT, and the total amount of VAT charged.