Do you need to register for VAT? What are the current limits? What schemes are available and which one will suit me?
In this article we cover these key questions. If you require any advice on VAT registration, please do get in contact.
When you need to register for VAT
The current limit for registration for VAT is £73,000. If your sales (taxable supplies) for the last twelve months reach this cumulative limit, you need to inform the National Registration Service that this is the case and register for VAT. This can be done online with HMRC http://www.hmrc.gov.uk/vat/start/register/how-to-register.htm
You must make this notification within 30 days of the end of the month where your turnover reached £73,000 to avoid paying any penalties.
What this means
Once registetred, you will be required to submit a return every quarter of all your taxable supplies (sales) and inputs (purchases). Each quarter you will usually have a payment to make to Revenue and Customs (known as HMRC) which is the difference between VAT charged on your sales and VAT claimed back on your purchases.
You will need to ensure that you keep proper books and records to enable you to do this on a regular basis as there are fines for late submission of the return.
We also advise our clients to pay any VAT due by Direct Debit to avoid any penalties from HMRC for late payment.
What are the drawbacks?
As indicated above, there is a requirement every quarter to complete and submit the return. You can appoint your agent (accountant) to do this for you and you can make payments of your VAT on line or by direct debit.
There are very strict rules in terms of the information you must provide on any invoices that you issue to your customers once you are registered. For instance, every invoice will need to have your VAT registration number on it and a breakdown of the sale value between net sales, VAT percentage used and total sales(gross sales).
Also, if your business primarily has a customer base of private individuals, you will need to consider the impact on your pricing of the additional VAT on your sales. Consider the two options below:
- Say previous sales were £100. You are now VAT registered and decide to pass onto your customer the VAT amount of 20.0%. Your price now increases to £120.00. You have to pay HMRC £20.00 (which is 20.00% of £100). This keeps your income the same as before at £100 but the customer bears the full price increase of £20.00
- You decide not to pass on the VAT to your customer. This means you still charge £100 but have to pay £16.67 over to HMRC meaning that you are left with £83.33 – a reduction in income only due to the fact you are now VAT registered.
In a business where competition is fierce, you will need to consider this aspect very carefully. Where your client base is made up of other VAT registered entities, these will simply claim the VAT back that you have charged with the net result being price neutral.
So – our advice is to consider your client base and what it will do to your incomeand margin.
Are there any advantages?
Some businesses will prefer to voluntarily register for VAT as it indicates a certain level of turnover/success has already been achieved. This may be the case where there is a small start up business tendering/quoting for a large contract..
There is a one off opportunity for a repayment from HMRC once you register as follows:
- You can claim VAT back on any goods you have bought for business purposes in the last four years which you still hold. You will need to make a record of the details of what these goods are, when they were bought and their respective costs. Make sure you have a valid VAT receipt for each purchase.
- You can claim VAT back on any services you have received for business purposes within the last six months if you have valid VAT receipts. Again, you need to make a list of what these are. It does not include anything consumable such as petrol, electricity, etc
This means that you can normally benefit from a one off repayment once you register.
Can I register and then change my mind?
You may be able to deregister voluntarily providing your turnover is below the deregistration limit. To find out whether you can, use the online tool here http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1074421793
Are there any alternatives to the quarterly return?
If your turnover is less than £600k per annum, you can apply to submit your VAT return once a year.
This reduces the quarterly ongoing admin burden for the business. However, most accountants favour a quarterly return as they provide an opportunity to touch base with their clients and review the books. Under this scheme, VAT is paid on account throughout the year in nine monthly or three quarterly instalments based on your previous year’s VAT liability.
What other schemes are there?
Cash Accounting – if your turnover is less than £1.35m and the majority of your transactions are cash based rather than invoice based, then you can account for VAT based on cash receipts. This is normally applicable to the retail sector. This scheme can also be beneficial where there are large amounts due from customers who are slow paying or have long credit periods.
Flat Rate – If your turnover is less than £150k (excluding VAT), then you can apply for your VAT due to be calculated as a percentage of your turnover. This percentage is dependant on your business sector e.g. accountancy is 14.5%.
In your first year of registration, you are eligible for a reduction of 1% on this percentage. You can also claim VAT incurred before registration on goods and services as explained above.
The flat rate scheme can also be used in conjunction with either the quarterly or annual basis.
The disadvantage of this scheme is that the flat rate applies to all income so if you are self employed and also have a second property which you rent out, the flat rate percentage would also be applied to that income.
Similarly, if your business is making a mixture of standard, zero and exempt supplies, the flat rate would be applied to all of this income.
Note: If you buy an expensive item (over £2k) you are permitted to account for the input VAT separately on the tax return.
What Next ?
You can register on line and/or find out more information about VAT by visiting: http://www.hmrc.gov.uk/vat/start/register/
If you wish to register for VAT, C and M Services can do this for you. We can also prepare and submit your VAT return on your behalf.
See our additional articles on VAT:
New Flat Rates: http://www.candmservices.co.uk/news/new-vat-flat-rates-announced/
VAT Inspections: http://www.candmservices.co.uk/news/vat-inspection/