When to register for VAT should be a straightforward question. However, there are a lot of questions to ponder before you take the plunge. For instance, when does a business need to register for VAT? Why might you register for VAT voluntarily? And, crucially, how do you register for VAT? IN Accountancy has the answers to all your VAT-related questions here.
What is VAT?
VAT is short for “Value Added Tax”, a type of tax added to many products and services. The VAT a business pays is the difference between any VAT paid to other businesses and the VAT charged to customers. A business must register for VAT when its vatable turnover reaches £85,000 in any rolling 12-month period.
When to register for VAT?
If your business’ taxable turnover has reached the £85,000 VAT threshold over the past 12 months, you legally must register for VAT within 30 days. Failing to register for VAT with HMRC promptly can lead to serious penalties, depending on how late you are to notify the tax man. For example, if your VAT registration is nine months late or under, HMRC can fine you 5% of what you owe on top of the VAT you should have paid. Between nine and 18 months, the penalty increases to 10% of what you owe, and beyond that, the fine rises to 15% (plus VAT owing).
In blatant cases of VAT evasion, where HMRC deems a criminal offence has been committed, and it is in the public interest, you could be prosecuted. The worst instances of deliberately misleading HMRC can lead to prison sentences ranging from six months to seven years. VAT evasion penalties may also be imposed, with a maximum of £20,000 that can be imposed in a magistrate’s court, rising to unlimited fines if the case goes to Crown court.
Penalty appeals can be made within 30 days from the date of the penalty notice letter if you can provide HMRC with a “reasonable excuse” for not registering for VAT on time. All cases are assessed on an individual basis.
Why register for VAT voluntarily?
There are also some instances when you may choose to register for VAT voluntarily. For instance, if you already have vatable expenses (especially for services), you wouldn’t otherwise be able to reclaim the VAT on those expenses without being registered. Another scenario might be that you are confident you will exceed the VAT registration threshold in the coming year. In this case, it can be easier just to register from the get-go.
Remember that if many of your clients or customers are already VAT registered, it won’t matter to them if you begin adding VAT to your invoices. However, the flip side of that equation is if you sell directly to consumers and compete with other small businesses. In this case, registering for VAT can make you 20% more expensive than competitors or hit your margins hard. Consider your options carefully!
Check out our video below for more advice about why, how and when to register for VAT.
What are the benefits of registering for VAT?
There are several benefits of registering for VAT. First and foremost, when you register for VAT, you can then reclaim VAT on purchases. You can recoup the difference if you pay more VAT than you collect from customers. Some larger organisations also prefer their suppliers to be VAT registered. Therefore, when you register for VAT, you can make your organisation appear bigger and more established than it is to potential new customers.
Of course, there are some downsides to registering for VAT. Bear in mind that doing so will inevitably lead to more paperwork. You may also pay more to HMRC if you collect more VAT than you pay. With all that in mind, it is important to weigh up the pros and cons of voluntarily registering for VAT. A well-qualified accountant can provide a welcome sounding board to help you decide based on your specific business circumstances.
Which businesses are exempt from VAT?
Some industries and supplies are exempt from VAT. You need to know what you are supplying and to whom to make an educated decision about whether or not to register for VAT. GOV.UK has a detailed list of goods and services that are exempt or outside the scope of VAT. Here is a brief selection to give you an idea:
- Betting and gaming
- Lottery ticket sales
- Admission charges by charities
- Charitable fundraising events
- Burials and cremations
- Hospital, hospice or nursing home care
- Sanitary protection products
- Houseboat moorings
- Financial services
How do I register for VAT?
Most businesses can register for VAT online. However, some businesses – such as those joining the Agricultural Flat Rate Scheme or those planning to use separate VAT numbers to register multiple parts of the business – can register for VAT by post using a VAT1 form. You will need the following details to complete your VAT registration:
- Business contact details
- Bank account details
- Unique Tax Reference number
- Nature of business and turnover.
Any business with a turnover equal to or greater than £85,000 in a 12-month period is legally obliged to register for VAT. However, even if your business does not meet the VAT threshold, you might still want to register for VAT voluntarily. This can help you to recoup some of your VAT payments, give your company more gravitas, and forge relations with bigger organisations. Just remember that these perks can come with more admin and potentially more costs. So you will need to weigh up whether the rewards are worth your while in the long run.
Of course, you don’t have to make this decision alone. The friendly and knowledgeable IN Accountancy team is here to help you consider the benefits and drawbacks of voluntarily registering for VAT based on your individual circumstances. For more information about registering for VAT or to book a free consultation call, please contact us at 0161 456 9666 or email firstname.lastname@example.org.