Many products and services sold in the United Kingdom and those imported from other European nations are subject to value-added tax, or VAT. When starting a business, many entrepreneurs wonder whether they must sign up for Value Added Tax. Is there a way to manage compulsory VAT registration?
If your business earns over £85,000, you must register for VAT and charge clients Output VAT added to the selling price, collect the money, and then remit it to HMRC.
For certain companies, becoming VAT-registered can create difficulties. Businesses that sell to consumers and are VAT registered charge 20% on top of their selling price. Their rivals not registered for VAT might seem 20% cheaper and more competitive.
If your pricing strategy is market-based, you might lose customers and money. Is there a way to, therefore, manage the process of registering for VAT?
Understanding the VAT Registration Threshold
When you reach or anticipate reaching the VAT threshold, you must register for VAT. This implies that if your company’s annual revenue is more than £85,000. You must register for Value Added Tax.
In the same way, you must register if you have or anticipate having monthly earnings that will be more than £85,000. You must be aware of your yearly turnover and any adjustments to the VAT threshold.
If any of the following apply to you, you must register:
- You have a VAT taxable turnover of more than £85,000 in the previous 12 months (the VAT threshold)
- You Foresee Almost £85,000 in Sales in the Following 30 Days
The following conditions also require registration (independent of VAT taxable turnover):
- You’re not local to the UK
- You have a company that is not headquartered in the UK.
- If you sell anything to the UK (or expect to in the next 30 days)
- Voluntary registration for VAT is available to businesses with an annual revenue of less than £85,000.
- From the date of your registration with HMRC, you are responsible for paying any VAT due to the government.
NOTE: You need not register for VAT if your sales fall within the VAT exemption category.
If you expect to go over in the following 30 days,
The yearly amount of your VAT taxable revenue must exceed £85,000 during the following 30 days for you to be required to register for VAT.
There is a 30-day window in which you must register. You must register as of the day you realised, not the date your revenue exceeded the criteria.
Can You Obtain a VAT Number Volutarily?
It is possible to voluntarily register for Value Added Tax even if your company’s current taxable turnover is below the current level.
A company could decide to sign up for Value Added Tax for two primary motives:
Since most of their customers are also VAT-registered firms, it is of little consequence to them whether or not their clients are VAT-registered.
The company benefits from being VAT registered since they often get refunds from HMRC.
Who is not eligible for a VAT number?
You can only register for VAT if your organisation qualifies as a business under HMRC’s definition.
If your company typically deals primarily in VAT-exempt products or services, you are also not eligible to register.
What is the VAT Registration Threshold for 2023?
The first step in determining whether your company has to file a VAT registration is assessing whether or not it has reached the VAT threshold. The value-added tax threshold is the point at which a company must decide whether or not to register for value-added tax. For the fiscal year 2023/24, the UK VAT threshold is £85,000.
Determining whether you’re over or below the VAT level is easy. To determine your company’s VAT threshold, apply the following steps:
Calculate your Taxable Income
Your taxable turnover is the money you make from selling VAT-eligible products and services. To determine your taxable turnovers, you must first determine the overall value of all your transactions included in the VAT calculation and add that amount to that total.
Verify your products’ or services’ VAT rate
The value-added tax (VAT) is charged at varying percentages for specific categories of purchases. Find out whether your products or services fall under the ordinary VAT rate, the reduced VAT rate, or the zero VAT rate.
Don’t count exempt purchases
The value-added tax (VAT) does not apply to all transactions. These transactions should not be included in your total taxable sales.
Sales figures from the past year should be included if applicable.
As the previous year’s taxable turnover determines your VAT threshold, all revenue generated during that period should be included.
When determining your taxable output, you may check whether it exceeds your country’s VAT threshold to decide if you must register for the tax. If your taxable sales exceed the VAT registration threshold, you must register for VAT. Voluntary registration is an option if your taxable revenue exceeds the VAT threshold.
NOTE: Maintaining precise records of revenue and expenditures is essential for accurately determining your VAT threshold. You should also check your revenue regularly to keep track of any shifts that influence your need to register for Value Added Tax.
Who Needs to Register for VAT?
If a company’s taxable sales for a rolling 12-month period are expected to be higher than the VAT registration level, the firm must register for VAT.
Another scenario in which a company would have to register for VAT is if it acquired another company already registered for VAT. The acquisition triggers the need for VAT registration if the sum of the buyer’s taxable turnover for the previous 12 months and the target company’s turnover is more than the registration level.
While most companies will not be affected by this rule, you must register for VAT if you anticipate your business’s revenue reaching the threshold within 30 days. For example, if you do business in a country other than the United Kingdom, you must register for VAT.
If registration is delayed, late registration fees and “failure to notify” fees may be imposed. Moreover, if the company has a VAT responsibility, late payment penalties and interest should be expected. If your company’s revenue momentarily exceeds the VAT registration barrier, you may apply for a temporary exemption from registration with HMRC.
Can I deregister For VAT?
If the VAT taxable turnover of your firm exceeds £85,000, you must register with HMRC.
If your company’s VAT taxable revenue drops below £83,000, you may request that HMRC revoke your VAT registration. You must revoke your registration if you are no longer qualified to be a VAT-registered business.
This might happen if you cease doing business, reduce your VAT-taxable sales, or join a VAT group. When no value-added tax is collected from the customer, this does not apply to VAT-exempt products and services.
You can view our in-depth VAT guide for more details.
Strategies Some Businesses Use to Manage the Compulsory VAT Registration Process
These are some methods that firms employ :
Encourage the buyer to make major material purchases.
When a contractor buys supplies for a task for construction projects or companies, he often bills the client the total cost rather than marking the price. If he passes on any material profits to his labour profits and focuses only on the labour service where the client provides the supplies, he will see a drop in his sales without a drop in his profits.
Hence, even if his sales are down, he still makes a profit.
Forced Sales Reduction by closing shop for a few days.
Although certain shops charge VAT on their hot meals, they have very little input VAT to claim back. Closing for one lunchtime to keep their turnover low helps them avoid exceeding the VAT threshold.
One-off projects do not Count
Large contracts or work items different from your usual business activity might be disregarded under the law when calculating whether or not your turnover has exceeded the threshold.
This is certainly subjective, but if your typical annual sales are £60,000 and you had a one-time contract for £15,000, that isn’t the type of job you generally do (and won’t do again), you can avoid having to register.
There has been a significant shift in your company.
A company that just moved above the VAT barrier but had also lost an employee recently that would not be replaced would be in a position to argue reduced sales due to reduced capacity and, therefore, fewer sales as a reason to not register for VAT.
What Do You Need To Do When Doing One-off Projects?
Let’s assume your business is running well with a stable income of £6000 per month and will continue its operations at this level indefinitely. You come across a one-off project worth up to £20,000 offered by a local authority. The work is related to the field but is beyond the scope of your daily tasks.
The local authority will make the final payment once the project is complete. This implies that the VAT levied on your total payment will all be charged in one quarter, which makes the VAT taxable turnover breach the VAT threshold (£85,000). If you don’t intend to register your business for VAT because you think the threshold will not be achieved again? Here is what you can do.
When considering the VAT threshold, it would help to ask yourself whether you need to factor in the extra £20,000. Most businesses might think, “Yes.” If you can prove that the extra activities carried out are exempt from VAT or unrelated to the business, you can avoid registering for VAT. But you should expect tough questions from HMRC as they want you to justify your position.
Related: Study our infographic to learn more about simplifying the overall VAT filing procedure by identifying whether VAT can be claimed or not.
Tests to determine whether income is business or non-business
You cannot declare the one-off income as non-business because it is a one-time contract. HMRC has introduced six critical tests to help determine whether your income relates to business or non-business activity; you should review your income in line with these before making a decision.
We advise you to seek expertise and support from an experienced VAT Accountant, or you can directly approach HMRC for its help and recommendations. If HMRC is convinced that the income earned is non-business related, request them to put it in writing to keep evidence, which you are expected to show for tax-related inquiries in the future.
What if your income has been declared business-related?
Suppose your income from the one-off project has been declared business-related. In that case, you can try convincing HMRC that your business expects its future taxable turnover to decline below the HMRC VAT deregistration threshold, which is £83,000 for the tax year 2020/21. You must provide all the relevant information and documents to strengthen your case, as your decision depends entirely on HMRC.
What are the VAT Rates for 2023?
Standard Rate – 20%
VAT is often charged flat 20%. Most services and products fall within its purview.
Reduced Rate – 5%
Products and services in the health care, fuel, heating, and child passenger safety industries, among others, are eligible for the 5% VAT rate reduction.
Zero Rate – 0%
Most food, books, and clothing for kids fall under “zero-rated” products and services. Even if no VAT is collected on sales of certain products, they must still be recorded on your VAT return. Charitable events that meet the criteria for exemption from VAT.
VAT Essentials for Businesses: Manage Registration and Returns with Ease
What are VAT Exemption Goods?
Sometimes, VAT (Value Added Tax) is not applied to the sale of items included in the VAT exemption category.
Here, we’ve mentioned a few:
Land
VAT is not required in many real estate and construction deals. Most land and buildings used for commercial or industrial purposes are exempt from VAT, but under certain circumstances, firms may elect to have these types of properties taxed at the standard VAT rate.
The term “option to tax” describes this situation. Any future sales of the relevant real estate and any other supply made by the elector shall be subject to the usual rate of taxation. As there are only a few conditions where a previously exercised choice to tax may be canceled, careful thought must be given beforehand.
Insurance
Value-added tax does not apply to almost all insurance dealings. Insurance Premium Tax, however, may be due on some insurance premiums.
Postal Service
The value-added tax does not apply to universal service obligation-related public postal services supplied by the Royal Mail. The value-added tax rate on all other postal services is the regular Rate.
Literacy and Learning
Institutions of higher learning such as these are free from charging value-added tax on their instructional and related services.
Finance
VAT is not charged on most financial service transactions. Nevertheless, other services directly connected to financial services, such as accounting, debt collection, management consultation, investment, finance, and tax advice, are often not exempt from taxation.
Welfare and Health
Care or medical treatment supplied by a qualified institution, such as a hospital, hospice, or nursing home, and health services performed by licensed physicians, dentists, optometrists, pharmacists, and other health professionals are exempt supplies under VAT.
Investing in Gold
Gold coins purchased for investment purposes are not subject to value-added tax.
Sport
Services provided by qualifying organisations in sports and physical education and participation in certain athletic and leisure events qualify for the exemption.
Gaming
Generally, betting and gaming establishments, bingo halls, and lottery sales are VAT-exempt. Yet, there are a few critical situations when you must account for VAT, including charging customers to enter a location that offers betting and gaming.
Culture
Public entities and other cultural entities that meet the requirements are exempt from charging VAT for entry fees.
Charity Auctions and Dinners
Charities may avoid paying sales tax on some fundraising activities.
How can an accountant add value?
Setting up your business comes with many managerial and financial responsibilities. You can handle many responsibilities, but managing all crucial business aspects together takes time and effort. These aspects can range from crafting a growth strategy to working out taxes and managing the business finances. While you may be excellent in one key aspect of your business, it does not imply that you will also be exceptional in managing other crucial aspects.
In this scenario, where your business has yet to register for VAT or plans to register it, you should hire a professional VAT accountant or speak to one. A professional can work out your VAT liabilities accurately by identifying the correct vat treatment for various items used in your business and advising on suitable methods to make the VAT process efficient.
Conclusion:
If your business’s taxable revenue exceeded £85,000 in the previous 12 months, you must register for Value Added Tax. But, before you register, consider the above-mentioned situations where you might not have to register. If you follow the methods mentioned, you may identify times when your business does not need to register for VAT.
Lastly, don’t think you can avoid registering for VAT every time your revenue approaches the VAT registration threshold. HM Revenue & Customs use anti-avoidance strategies that can pick up incorrect VAT dealings quite quickly.
No matter what you decide to do, it would be best if you got the counsel of a qualified accountant before implementing any VAT-related procedures. This article is informational; all information should be followed after seeking suitable advice.
