Do I have to think about VAT?

All types of entities must comply with VAT rules including not-for-profits, social enterprises, community interest companies and charities. This applies to individual sole traders, partnerships (including LLPs), all types of companies (including limited by guarantee), co-operatives, trusts, clubs, associations, even informal groups (with apologies if we’ve missed your entity type, you’re still in the VAT net!).

You must be “in business” to register for VAT. You are in business for VAT if you have any (no matter how little) income related to vat supplies (see our guide VAT supplies, exemptions and rates). If all your income is from true grants (see our guide to VAT and grants) or sales that are exempt from VAT, then you can’t VAT register voluntarily or be required to VAT register.

If you are intending to be in business but have not yet started selling (e.g. you’re fitting out your new premises), you can register as an intending trader (HMRC manual).

If you are involved in multiple businesses you may have to “aggregate” the income from each of them to check the VAT registration threshold. This can include businesses, that are quite different, and even owned by someone else (e.g. your spouse or partner). This is a complex area, and if in any doubt please book a free online meeting with us.

For entities that are in business, VAT registration can be voluntary or compulsory:

Voluntary registration:

If your customers are all or mainly (see note 1) other businesses that are VAT registered, it can be to your advantage to register for VAT. You will then charge VAT on top of your sales price, and your customers will claim this back on their VAT return. The benefit to you is that you can then either claim back the VAT on your costs or use the flat rate scheme (see note 2) to save money.

There can be a perception that a VAT registered business is more established. This is a weak argument for VAT registration, unless your customers are VAT registered businesses as described above.

Compulsory registration:

First see the HMRC Guide Register for VAT to understand the basic requirements.

You must have a record of how much of your income is subject to VAT (see our guide VAT supplies, exemptions and rates). If you buy services from overseas, you’ll also need to include the cost of those services.

You must date each income item. For a business not yet registered the date is the earlier of:

• when the goods or services were provided to your customer (see note 3)
• when payment for the goods or services was received.

Incidentally, if you are VAT registered, the date of invoicing is added to that list to work out the date a supply counts for VAT. The date of invoicing is ignored prior to VAT registration.

You must now add up your income list on a per calendar month basis. At the end of each month, calculate the income subject to VAT for the past 12 months. Ignore accounts dates and tax years, they don’t affect VAT.

If at the end of any month your income for the past 12 months is more than £85,000, you must register on or before one month and 1 day after the month that you exceeding the threshold, and tell HMRC within 30 days. For example, if turnover past 12 months exceeds the threshold for the first time at the end of June, you must register from 1 August, and must tell HMRC by 30 July.

You must also immediately register if at any time you expect your income subject to VAT to be more than £85,000 in the next 30 days. This prevents a new company being formed, with a known sale of say £100,000, avoiding VAT on the basis that they were not yet registered.

Registration process:

Once you have decided you want to voluntarily or find that you must register, the registration process is online, which can be found here.

You can decide on your registration date, up to four years in the past or a date in the future. However if you register from a date in the past, you’ll need to go back and charge VAT on all supplies made since the registration date.

VAT returns are normally submitted quarterly (exceptionally monthly or annual returns can be beneficial and applied for, but they are pretty rare in our experience). When applying for VAT registration we recommend choosing the quarterly pattern to coincide with your accounts date (e.g. accounts date 30 June, choose VAT pattern 3/6/9/12).

HMRC will issue a VAT number in due course. This can take months in some cases.

What to do between the registration date you asked for, and actually having an VAT number

You must and cannot charge VAT on VAT supplies you make in that period! To explain, first what you can’t do is raise a VAT invoice as this must have a VAT number. Therefore you mustn’t show an “amount of VAT” on sales invoices raised during that period. However, when you prepare your first VAT return, you must include VAT on those sales.

The practical way to handle this is to add to your invoices a line item with the description “amount charged in lieu of VAT” for what will be the VAT amount. Do not set your bookkeeping system to “VAT registered” just yet. So if you charge £100 a standard VAT rated sale, show this on your sales invoice as normal, but add another line for £20. The total invoice will then be £120, with technically no VAT which is correct and can be sent to your customer for payment.

Once you have your VAT number, record this in your bookkeeping system settings to show you’re now VAT registered. You then go back to the invoices in the period since your registration date. Delete the “in lieu of VAT” line, but allow the system to calculate the VAT. The gross total should be the same as before. You then send this amended invoice (now a VAT invoice) to your customer for their records. If they have paid the earlier invoice there will be nothing further to pay.

First VAT return

Once HMRC have accepted your VAT registration they will notify your first VAT return period. This will usually be from the registration date you’ve asked for to a quarter end date falling in the pattern you’ve asked for.

VAT returns must be submitted by one month and one week after the VAT period. Payment must be then paid, unless paying by direct debit which is usually taken a few days after the return due date. Submitting the VAT return early doesn’t change the payment due date.

The first VAT return can include costs of buying the following in the pre-registration period:

• Goods (anything physical) bought in the 4 years prior to registration and still on hand at the point of registration.
• Services (everything else) bought in the six month prior to registration and not sold on by the registration date.