As a new business, you may not think you need to worry about VAT at this stage. However, a successful business can hurtle towards the VAT registration threshold sooner than they realise. This guide outlines the things you need to know when you are approaching the VAT registration threshold.
When does a business need to register for VAT?
A business must register for VAT when its taxable turnover exceeds the VAT registration threshold, which is currently set at £85,000. However, a business can register for VAT voluntarily if its taxable turnover is below the threshold. Taxable turnover is income that would be subject to VAT at 0%, 5% or 20%. It does not include exempt income or income that is outside the scope of UK VAT.
A business must notify HMRC within 30 days of the end of the month in which the threshold is breached. For example, if the business breached the VAT registration threshold on 08 April 2019, it must notify by 30 May 2019. The VAT registration date will be the first day of the second month after the business went over the registration threshold. So in this example, the VAT registration will be effective from 01 June 2019 unless an earlier date is chosen.
If the business has an unexpected boom in business trade, and it felt that it may exceed the taxable turnover in the next 30 days alone, it would have been required to register for VAT within 30 days of that expectation arising.
When should a business start charging VAT?
The business must charge VAT from the effective VAT registration date – this is selected during the application process. If the effective date of VAT registration has been backdated, then VAT is declared on all sales made following the effective registration date.
Some businesses wrongly assume that they do not charge VAT until they have received their VAT registration certificate in the post. However, this can take up to 30 days, at which point they may have undercharged VAT for several weeks.
What happens if you don’t register for VAT on time?
If the business fails to notify HMRC on time, HMRC may issue a penalty. Penalties for failing to VAT register on time are calculated as a percentage of ‘potential lost revenue’. The penalty percentage is typically 30% (although can be as high as 100% if the failure is deemed to be deliberate and concealed). There is scope to reduce this penalty.
If the business fails to register on time, it will have to declare VAT on all sales made following the point the requirement to register for VAT arose. If the customer is VAT registered it may be possible to issue an invoice for the VAT on top of the sales made as the customer should be able to reclaim this VAT. However, if the customer is a private individual or a business that is unable to reclaim its VAT, the VAT due will likely have to be absorbed by the business representing a decrease in profit. In this instance, the business will need to treat the sale price as gross and VAT is declared based on 1/6 of the money received.
Are there any special VAT schemes that could make life easier for new businesses?
There are a number of special schemes which the business could operate. These schemes include:
- The flat rate scheme – under this scheme VAT is paid to HMRC using a fixed percentage which is typically lower than the standard rate of VAT. Under this scheme a business would still charge 20% to their customer and they would keep the difference. This amount kept is meant to act as a proxy for the VAT a business would normally reclaim on its purchases. This is because you cannot claim any VAT on purchases under the flat rate scheme (other than capital purchases).
- The second-hand margin scheme – if the business purchases goods from private individuals or other traders where no VAT is charged, the business could operate this scheme. Under this scheme VAT is only declared on the margin (sales price – purchase price), rather than the full selling price.
- The cash accounting scheme – under this scheme the tax point shifts from the date of the invoice to the date cash is received by the business. This allows businesses to defer paying their VAT to HMRC until their customers have paid. The business will not be able to reclaim VAT on its purchases until it has paid its suppliers.
- Annual accounting – this scheme allows one VAT return to be filed per year, rather than one quarterly. However, interim payments are required throughout the year. This reduces the administrative burden of VAT registration, but it can present cash flow problems for business which receive regular repayments from HMRC.
What are the next steps now that my business is VAT registered?
Now the business is VAT registered it must account for VAT on all sales that are subject to VAT. The business can also reclaim VAT on purchases made in the UK. If stock is purchased from outside the UK, the VAT treatment will be different.
What is the VAT position on goods purchased outside of the UK?
Goods purchased from suppliers in the EU attract acquisition tax. This means that the business must charge itself VAT, but it can also reclaim this VAT (box 2 and 4 on the VAT return). If goods are purchased from suppliers outside the EU, import VAT will be due at the point the goods enter the UK, unless the business arranges for a deferment account to be set up. The business can recover import VAT through the VAT return as long as a C79 import VAT certificate is received (these are automatically generated by HMRC if an EORI number is quoted on a C88 import declaration).
Can I reclaim VAT on goods purchased for my business prior to VAT registration?
It is also possible for the business to reclaim some of the VAT incurred prior to VAT registration. VAT incurred on services in the 6 months prior to VAT registration can be claimed. The business can also go back 4 years for goods as long as they are still on hand at the time of registration (i.e. stock that has not been sold or fittings at the premises).
When do I need to file my first VAT return?
VAT returns must be submitted every quarter. The VAT return submission and payment deadline is 1 month and 7 days following the end of the VAT period. For example, the VAT return for the period ending April 2019 is due for submission on 7th June 2019.
From 1st April 2019, the process of compiling and filing VAT returns changed. The introduction of Making Tax Digital for VAT means that businesses will have to calculate and submit their VAT return to HMRC via API enabled compatible software. For more information please visit our website.
We are always on hand to help you with any questions concerning VAT, no matter how small. If you would like to discuss the above, or any other VAT matter, please contact our VAT partner Alison Birch.