Registering For VAT
Summary of Key Points
- Genuine commercial enterprises can choose to register at any time.
- There are strict rules on registering once your VAT sales are above £85,000 (from 1 April 2017).
- High inflation means the £85k is the equivalent of £66k at March 2023.
- If you buy another business which is VAT registered, you probably need to register.
- When you register, you can claim back input VAT on services bought in the last six months.
- You can also claim back input VAT on purchases bought in the last 4 years and still in use.
- If you are running two separate businesses, get specific advice on their VAT position.
There are strict rules on when VAT registration is necessary. The penalties for breeching these rules can be hefty.
Any business can register at any time, so long as it is a genuine commercial enterprise. A “hobby” business which registers, makes a net VAT reclaim, then de-registers soon after, is likely to be pursued for the refund.
There are several legitimate reasons why a business would choose to register:
- Customers may perceive the business in a better light.
- It might have a valid VAT reclaim on a large value bill, which it won’t be able to claim back if it delays from registering.
- The business may have some zero-rated sales, but standard rated purchases. In this case the business might well have a VAT repayment due to it on most returns it makes.
The £85,000 threshold has been in place since 2017. This is a useful "stealth tax" since inflation drags more businesses into VAT as the purchasing power of the pound erodes. In 2017 money, the threshold was £66k in March 2023 and forecast to be just £62k in March 2024. Because of this, my advice if you are close to the threshold is to register for VAT rather than, for example, turn away bookings in order to stay below the threshold.
A business must register for VAT if:
- Its taxable supplies in the previous twelve months have been above the limit – which, from 1 April 2017, is £85,000.
- It expects its taxable supplies in the next 31 days to exceed £85,000.
- It takes over another business as a going concern – and that business is itself VAT registered.
The Twelve Month Rule
In order to be sure you are under the limit, you must keep a record of your taxable sales on a rolling twelve month basis. Taxable sales:
- Include zero-rated sales but not sales which are VAT exempt.
- Is calculated on the gross value of the sales, even in the case where the business will be eligible to use the Second Hand Margin scheme once it registers.
- Is measured every month end. If you go over the threshold you must apply to register during the following month.
The Good News and Bad News of Registering
For most businesses it’s mainly bad news. There are strict records to keep, complex rules to at least have some knowledge of, and tax to regularly hand over to HMRC or face penalties.
This is especially true of cash businesses such as retailers, hairdressers and pubs who will not be able to put their prices up to customers to cover the VAT. A business selling mostly to VAT-registered customers should find life easier, as they’ll be able to reclaim the VAT charged to them.
The good news is that on your first return you can claim back extra input tax:
- On services invoiced in the previous 6 months.
- On stock, fuel and assets bought in the previous 4 years and still in use in the business.
Whatever items you claim back the tax on, ensure you keep all the invoices to hand. Any reclaim over £2,000 is likely to attract the attention of your friendly local VAT team who will pay a visit to make sure you are not carrying out a VAT fraud on the Exchequer.
Since VAT is 90% bad news, businesses often come up with the idea of splitting into 2 – so for example instead of having one business with £90k taxable sales which has to register, you’d have two of £45k and neither has to register.
HMRC are well aware of this strategy, and there are detailed rules and a number of Tribunal cases surrounding this area. If you take this approach – either with the aim of keeping outside of the VAT system, or for some other completely different reasons – be careful! Get advice on this issue which is specific to your own business – some of these Tribunal cases have resulted in wins for the taxpayers based on seemingly minor differences from other cases HMRC have won.