What is Value-Added-Tax (VAT)?
VAT is a tax on the consumption of goods and services applicable in 175 countries worldwide. In the UK, consumers pay VAT, businesses collect it at each stage of the supply chain, and HMRC administers it.
When a business charges VAT on goods or services, it must pay this VAT to HMRC. Businesses can also reclaim the VAT they have paid on purchase pays the VAT.
The standard rate of VAT in the UK is 20%. Some goods and services, such as children’s clothes or food, have lower VAT rates. Others are zero-rated or exempt.
When do you need to register for VAT as a business or as a self-employed person?
Registered businesses, partnerships, and the self-employed must register for VAT if their taxable annual turnover exceeds £85,000. Once registered, they must charge VAT on applicable goods or services, and submit VAT returns.
Your business must register for VAT if:
- your total taxable turnover for the last 12 months was more than £85,000); or
- you expect your turnover to exceed £85,000 in the next 30 days.
Remember to keep accurate records to know if and when you exceed the threshold within 12 months. The £85,000 threshold averages to £7,083 per month or £21,250 per quarter.
What is included in the total taxable annual turnover?
When determining if you meet the £85,000 VAT registration threshold you must calculate your total taxable turnover.
This includes:
- Sales of all standard-rated, 5%, or zero-rated goods and services.
- Rent received from letting goods and or property.
- Goods bartered, part-exchanges, or given as gifts (for example, goods to influencers or bloggers in exchange for content, branded merchandise, bartering services in exchange for other services, and more).
- Sales of vehicles and other assets.
- Commissions and bonuses.
- Goods used personally that were originally bought for the business.
- Reverse charge services from overseas suppliers.
- Building work over £100,000 the business did for itself.
Your annual taxable turnover does not include:
- Sale of goods that are VAT exempt, such as certain financial services, insurance, healthcare, education, etc.
- Statutory sick pay.
- Sales of capital assets like property, businesses, equipment, etc.
How to Register for VAT
You can complete the VAT registration application on the GOV.UK website at https://www.gov.uk/register-for-vat/how-register-for-vat.
You can start charging VAT on your sales and reclaiming VAT on items you bought from your ‘effective date of registration’ and deal with HMRC on your behalf.
To register for VAT as a limited company, you’ll need:
- The company’s registration number.
- Business’s bank account details.
- Unique Taxpayer Reference (UTR).
- Details of annual turnover.
To register for VAT as an individual or partnership, you’ll need:
- Your National Insurance number
- An identity document, such as a passport
- Bank account details
- Unique Taxpayer Reference (UTR)
- Details of annual turnover
After you’ve registered for VAT, you will get:
- A 9-digit VAT number, which you must include on all invoices.
- Information about using the VAT online service.
- Information about your first VAT return and payment.
- Confirmation of your effective date of registration.
Accounting for VAT while you wait for your VAT registration number
You cannot include VAT on your invoices until you get your VAT registration number, but you can increase your prices to account for the VAT that you need to pay to HMRC.
Voluntary VAT Registration, or how to register under the threshold
Businesses with an annual taxable turnover of less than £85,000 can voluntarily register for VAT. This enables them to charge VAT and reclaim it on purchases.
Late registration and the risk of penalties
There are consequences for not registering when legally required to do so. If you exceed the turnover threshold and do not register on time, you may have to pay HMRC the VAT due from when you should have registered. Late registration can also mean paying financial penalties based on how overdue the VAT registration is and the amounts owed.
How and when to get a VAT Exemption?
Businesses can apply to HMRC for a temporary exemption if they exceed the £85,000 threshold due to an unusual, short-term spike in taxable turnover. The application must include evidence showing turnover is expected to fall below £85,000 in the next 12 months.
HMRC reviews applications to determine if granting an exception avoids unnecessary compliance burdens for businesses whose high sales level is temporary.
What are the changes and responsibilities after VAT registration?
As a VAT-registered business, you must:
- Issue valid VAT invoices for all taxable sales, including VAT charges.
- File and pay VAT returns – usually every three months.
- Maintain accurate VAT records.
- Use VAT accounting schemes if they simplify compliance.
Issuing VAT Invoices
You must provide VAT invoices to customers showing the VAT charged. VAT is calculated based on the full sale value, including exchanges or part exchanges.
Filing VAT Returns
You must report the total VAT collected and paid to HMRC in VAT returns every three months, even if no VAT is due. Over-charged VAT must be paid, and any underpaid VAT can be reclaimed.
Record Keeping
You must keep records of all sales and purchases with VAT details for HMRC reporting and audits.
VAT Schemes
Some schemes, like Flat Rate or Cash Accounting, can simplify VAT accounting for small businesses. Please speak to our team for more information.
What can you reclaim VAT on?
Businesses registered for VAT can reclaim the VAT paid on many goods and services that are used specifically for operating the company, like staff travel, phone bills, company vehicles and fuel, utilities for home offices, etc. However, entertainment costs and assets only used personally by owners cannot have their VAT reclaimed.
What are the costs and administrative work required for VAT?
Costs and administrative work include:
- Accounting system requirements: You may need to upgrade your accounting software and systems to track VAT details.
- Additional software, staff training, or professional advice
- Knowing how HMRC payments work. VAT payments to HMRC are made online through bank transfers or direct debit. VAT refunds can be claimed the same way.
We hope this outline of VAT registration requirements, process, and post-registration obligations has been helpful. Please reach out if you have any questions.
As your accountants, AcuAccounts is committed to helping clients comply with VAT rules and avoid penalties. We’re ready to assist with VAT scheme advice, accounting system changes, and overall optimization of your VAT compliance. Our goal is to ensure your business has smooth and orderly VAT handling at every stage.
Want to find out how to best manage VAT for your business finances?
Get in touch at info@acuaccounts.com and book a consultation with our team. You can also call us directly on 0203 907 9027.
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