If you own a business in the UK, you really can’t ignore VAT. Otherwise, you potentially run the risk of not staying compliant and struggling to keep your finances in order. A lot of businesses only think about VAT when they’re close to the registration threshold, but waiting too long can lead to fines, surprise tax bills and more paperwork. It’s important to know when you should register for VAT ahead of time, so you’re not caught out.
What is VAT?
VAT – which stands for Value Added Tax – is a tax on most goods and services sold by businesses in the UK that are registered for VAT. If you are registered for VAT, you usually have to add VAT onto your sales, known as output VAT. You also have to pay VAT on business purchases that qualify, known as input VAT. You then inform HMRC of the difference between the two, and pay what you owe. By charging customers VAT, paying VAT and sending the difference to HMRC, you are essentially collecting the tax.
Registering for VAT
Before you look at the rules on registering for VAT, you need to know what taxable turnover is. This is the total amount of money you make from selling goods and services that aren’t exempt from VAT. The VAT registration limit only applies to taxable turnover, not all of your income.
When You Have to Register for VAT
If certain conditions apply, you have to sign up for VAT. Going over the VAT threshold is the most common reason, but there are others.
If You Go Over the VAT Threshold
If your total taxable turnover for the last 12 months is more than £90,000, you need to register for VAT. This is calculated on a rolling basis, not by the tax year or the accounting year. That means you should look back over the last 12 months, and do so every month, to see how much money you made.
If You Think You’ll Go Over the Threshold in the Next 30 Days
If you know that your taxable turnover will go over £90,000 in the next 30 days, you need to register for VAT. This could happen because of a big contract or a sudden rise in sales. If this happens, you have to sign up by the end of that 30 day period.
If You’re an Overseas Businesses Selling to the UK
VAT registration is required regardless of turnover if your business is based outside the UK, or if you’re going to be supplying – or expect to supply – goods or services to the UK within the next 30 days. This makes sure that VAT is collected correctly on goods and services that cross borders.
Voluntary VAT Registration
You can still register for VAT even if your turnover is less than £90,000, and this is known as voluntary registration. Some businesses do this because there are advantages, such as being able to reclaim VAT on business purchases, your business potentially looking more established or trustworthy, and it can make it easier to work with clients or suppliers who are registered for VAT. Plus, voluntary VAT registration means you don’t have to suddenly register if your business grows quickly.
However, there are a few downsides. For example, you have to charge VAT, which can make prices increase for customers who aren’t registered for VAT. You’ll also have to do more paperwork and reporting. Depending on when payments are made, you might also notice a change in your cash flow.
When You Don’t Need to Register for VAT
If your business only sells goods or services that are ‘out of scope’ for VAT, you don’t need to register. You still need to keep track of those transactions, but you can’t charge VAT on anything that’s exempt. There’s a wide range of goods and services that are VAT-exempt, such as:
Financial services, investments and insurance
Garages, parking spaces and houseboat moorings
Land, buildings, and property
Education and training, excluding private schools
Healthcare and medical treatment
Charity events
Plans for funerals, burial or cremations
Antiques
Gambling or lottery tickets
If you only sell goods or services that are exempt from VAT, you don’t need to register for VAT.
What Happens Once You’ve Registered for VAT?
Once you’ve registered for VAT, your responsibilities increase. You’re responsible for charging VAT on sales that apply, sending out invoices that follow VAT rules, submitting VAT returns, paying any VAT you owed by the due date and keeping digital records.
What Happens If You Register for VAT Late?
Registering for VAT late can be expensive, which is why it’s important to register as soon as you need to. If you don’t register when you should, you’ll have to pay VAT on any sales that were made after you should have registered. You might also have to pay fines for the mistake, as well as interest on unpaid VAT. If you didn’t charge customers VAT at the time, you might end up having to pay VAT out of your own pocket, which can be costly. Penalties depend on how late you were to register, how much VAT you owe and whether the delay in registration was a genuine accident, or if you purposely avoided it.
Top Tips for Handling VAT as a Small Business
It’s a lot easier to handle VAT if you have clear systems in place, and it also reduces the chance of you making a mistake. To give yourself the best chance of handling VAT correctly:
Check your sales every month.
Don’t just look at your annual accounts, look at your rolling total.
Separate business income that’s taxable from income that’s not.
Make sure reports are clear, so mistakes are less likely.
Keep track of invoices, receipts and digital transactions.
Use accounting software to keep track of everything.
If you’re growing quickly, get ready to register for VAT before you have to.
Use automated systems to keep an eye on thresholds in real-time.
Plan to pay VAT ahead of time, so you’re not hit with a last minute tax bill.
If you own a business in the UK, you really can’t ignore VAT. Otherwise, you potentially run the risk of not staying compliant and struggling to keep your finances in order. A lot of businesses only think about VAT when they’re close to the registration threshold, but waiting too long can lead to fines, surprise tax bills and more paperwork. It’s important to know when you should register for VAT ahead of time, so you’re not caught out.
