VAT, or Value Added Tax, is one of the things all businesses need to be aware of. It’s important, for example, to understand what the ‘VAT threshold’ is and when you need to register for VAT.
It’s also important to consider what benefits you might get from registering even if you are below the threshold. Here we’ve outlined if, when and how you need to register for VAT for your business.
The current VAT rates are standard 20%, reduced rate 5%, and zero rated 0%.
What is the VAT threshold?
The VAT registration threshold in the UK currently stands at £85,000. If your business’ annual turnover exceeds this threshold you must register for VAT. If you fail to do so within 30 days, you might face a fine.
It’s important to recognise that this figure is liable to change. The VAT threshold for 2016 was £83,000 and this has risen steadily from £77,000 in 2012 and £64,000 in 2007. You should check what the threshold is for each financial year so that you’re up to date.
You can use Xero to keep an eye on your turnover. As your bookkeepers, we can also help you do this.
You should also note that this figure is calculated on a rolling 12-month basis (the last 12 months from any given point) and is not based on turnover in a calendar year.
For example…On 1st May, you realise that your VAT taxable turnover in the next 30-day period will take you over the threshold. You must register by 30 May. Your effective date of registration is 1 May.
Do I need to register for VAT?
So, if your turnover exceeds the VAT threshold discussed above, of £85,000, then you must register for VAT. However, you can also voluntarily choose to register your business.
Registering for VAT can ensure that you are ready to grow as a business – creating a positive impression about your intent – and allows you to reclaim VAT on purchases you make.
There are also difference thresholds for buying and selling from other EU countries. You can find out more here.
Are there any exceptions?
You can apply for a registration ‘exception’ if your taxable turnover goes over the threshold temporarily.
Write to HMRC with evidence showing why you believe your VAT taxable turnover will not go over the de-registration threshold of £83,000 in the next 12 months.
HMRC will consider your exception and write confirming if you get one. If not, they’ll register you for VAT.
What are the benefits of registering for VAT?
If your business falls above the VAT threshold then registering for VAT is vital for your business. However, VAT isn’t just a matter for bigger turnover businesses and it’s definitely worth weighing up the pros and cons of registering.
The advantages of registering for VAT:
- You get a VAT registration number. This may not seem too exciting, but your business can benefit from displaying your VAT registration number on all your documents, website, and stationery. This can add credibility to your business and give you a more trustworthy and professional image.
- You can claim VAT refunds. Once registered, you can reclaim for VAT on all goods and services your business buys. This must be balanced with what your business is charging and receiving in VAT payments over the year. If you have invested in equipment, plant, machinery or IT, you may be able to reclaim a large amount of VAT. When it is time to submit your VAT return, you may find that the HMRC sends you some money for a change!
- You can reclaim VAT from the past. By registering for VAT, you may be eligible to claim for VAT from the past 4 years for items that you are still using. This would require you being in business for this length of time and having kept VAT invoices and records for the period.
- Improve your business image and dealings. If you are a new small business, another benefit to being VAT registered is that most people are aware of the VAT threshold. You then appear to your potential customers that you are bigger than you actually are by displaying your VAT number.
This may also help you when it comes to dealing with other businesses. Some businesses prefer it if you can raise a valid VAT invoice and they can reclaim the VAT on your service/product.
These four big benefits to being VAT registered may appeal to you as a small business. However, remember that you will have to keep accurate records and submit regular VAT returns. There are many software solutions to assist with VAT or your accountant can help.
Are there any downsides to registering?
- VAT could hamper the appeal of goods and services to customers who are not VAT registered, particularly if the final cost of the sale with VAT is deemed unreasonable or overpriced.
- Extra paperwork and administration is an unavoidable consequence of VAT registration. Businesses will require keeping all VAT invoices and receipts, maintain VAT accounting records, and file VAT returns every quarter. However, this can be made easy with Xero.
If your turnover is below the VAT threshold, it’s important to weigh up the pros and cons carefully for your situation if you are unsure. You can even discuss this with our team if you’re thinking of registering for VAT.
Which VAT scheme should I use?
There are a number of different VAT schemes open to businesses and so it’s important to consider which is best for your circumstances. Typical schemes include:
- The Flat Rate Scheme: This is for businesses with a turnover of less than £150,000. Under this scheme you pay a percentage of your turnover to HMRC, with set rates for individual industries, but can’t claim back VAT you incur on purchases.
- Cash Accounting Scheme: This is common among small businesses as you only need to pay HMRC the VAT income you’ve actually received during a quarter. This does, however, mean that you can’t claim VAT back for any invoices that haven’t been paid. Businesses have to have a turnover below £1.35 million to be able to access this scheme.
- Annual Accounting Scheme: Instead of making quarterly returns, this scheme lets you make advance payments towards your bill throughout the year. You then file one VAT return and pay the balance – or claim back a refund for any overpayments. This is only eligible for businesses with a turnover below £1.35 million.
These are the main options, although there are a number of VAT retail schemes for businesses in that sector.
What you'll need to register for VAT
If you want to register for VAT then this can be done online in most cases (or by using paper form VAT1). Before you log on and begin your registration, you need the following information to hand:
- Your Unique Tax Reference. This is a ten-digit number you’ll have been sent when registering to pay Corporation Tax.
- Your business’ bank account details.
- Your company number and registered address.
- Details of any associated businesses from the past two years.
You might also need the details of any businesses being transferred or bought, if applicable.
When you register for VAT, you should receive VAT registration certificate (VAT4). This will state:
- your VAT registration number
- the date you need to submit your first VAT Return and payment by
- your ‘effective date of registration’
You will quote your VAT registration number on any receipt or invoice in which VAT is applied to goods and services.
More useful information
- You can find more information directly from HMRC at https://www.gov.uk/vat-registration
- Call HMRC on 0845 010 9000 if you have any further questions about VAT thresholds or VAT registration.
- Read other updated blogs and news about VAT and how Brexit might affect VAT
- Contact the team if you have any questions about VAT or registering for VAT. You can contact us via email at firstname.lastname@example.org or call us on 01858 289 189