VAT registration considerations

Your business must register for VAT from the end of the month following the month in which its taxable turnover first exceeds the annual VAT turnover threshold, or when you expect to exceed that threshold in the next 30 days.

The current VAT registration threshold is an annual taxable income of £90,000.

There are a lot of opportunities in the previous two sentences to make a mistake over when you should start accounting for VAT, and all of the outcomes are costly and best avoided. Taking each possibility in turn:

• Making sure you understand how the HMRC view you business arrangements: Thankfully it is rare, but we have seen cases where people have set up two small, and as far as they are concerned, unconnected businesses with annual turnovers well below the VAT registration threshold, only to find the HMRC look at the arrangement in a different way. It never occurred to the owners that the HMRC might view their two businesses as a single entity for tax purposes. If the aggregated annual turnover of the two businesses exceeded the VAT threshold, then both businesses would face VAT back-duty assessments from the date they should have registered. Examples of when the HMRC may vier two businesses as one entity might be a fish & chip shop owner who also attends shows with a mobile pie & mash van. Both may serve different markets and operate from different locations at different times, but they share a common purpose of preparing and selling food, which will be the determining factor from the HMRC's perspective.
• Taxable Turnover: What constitutes taxable turnover for VAT registration purposes is not always straightforward. Failing to recognise what must be taken into account may lead to discovering the VAT registration threshold has been unexpectedly exceeded.
• The HMRC state taxable turnover is the total value of taxable supplies made by a person in the course or furtherance of business, excluding VAT (VAT Act 1994, section 19). This includes:
  • zero-rated goods.
  • reduced-rated goods
  • standard-rated goods
  • goods you hired or loaned to customers.
  • business goods used for personal reasons.
  • goods you bartered, part-exchanged or gave as gifts.
  • services you received from businesses in other countries that you had to ‘reverse charge’.
  • goods and services which are subject to the ‘domestic reverse charge’.
  • building work over £100,000 your business did for itself.
• Threshold: The VAT threshold is periodically changed on 1 April. For many years the threshold has been uplifted to reflect inflation, but it could be lowered in the future with obvious implications.
• Expectation: A business must register with the HMRC that it expects to exceed the VAT turnover threshold within the next 30-days. Failing to meet this obligation will give rise to penalties. If the cause of the rise in taxable turnover is an exceptional and short-lived event that will result in the business continuing to operate below the VAT deregistration limit that is currently set at £88,000, then they can apply for exemption from the need to register for VAT.
• Annual taxable turnover: The need to register for VAT is determined by considering your last 12-months of trading results at any point in time. It is not based on your fixed accounting year used for other reporting purposes. This means businesses that trade just below the VAT registration threshold must account for seasonal variations in their turnover, and ensure they are monitoring the moving 12-month annual turnover to determine if they have just slipped over the registration threshold limit.
• The danger here is if you leave it to your accountant to draw up your trading figures after your year end, they may discover you should have registered for VAT many months ago. This would prove very costly, as the HMRC will expect you to account for the VAT you should have charged from the deemed VAT registration date. In practice, the final tax bill will be reduced by the input VAT you could claim, but failing to register when you should is best avoided.

MAAP has adopted a trading strategy to avoid exceeding the annual VAT turnover threshold as a life-style choice that allows us to provide a first class professional service to a small group of clients, and still have time to enjoy other personal pursuits. It makes no difference to VAT-registered clients because they can recover the VAT we would otherwise charge. To organisations that are not VAT-registered, our non-VAT status translates into a valuable 20% discount on our services.

There is nothing difficult about accounting for VAT, and it is a mistake for a business to deliberately limit their potential to grow because of a concern over, what to us, is a simple administrative process. If you feel this way, talk to us about how we can give you the confidence to forget about VAT holding back your potential to expand your operations.

Remember, not being VAT-registered when your potential clients expect you to be, may be viewed as a negative reason for not using your services or products. Being too small an operation to gain the confidence of potential clients can be a marketing perception issue for new businesses, which is why voluntarily registering for VAT long before you reach the VAT turnover threshold can overcome that problem.