The vast majority of goods and services in the UK qualify for a 20% VAT charge, which is added onto the base cost.
Before they can charge VAT, UK companies need to go through a VAT registration process - whether or not this registration is mandatory depends on the turnover of your business.
In this post, we will help you to understand the registration process and to decide whether or not to register voluntarily if you don’t meet the threshold.
The VAT registration threshold
VAT registration is compulsory for all businesses with a turnover of £85,000 or above in a 12 month period.
If you know that you are going to cross that threshold in a 30 day period, it is also mandatory.
Remember, HMRC is interested in taxable turnover, not profit, which means that a lot more businesses meet the criteria than you might think. If you know your business meets that threshold and you just want to find out about the registration process, you can skip down to the ‘how to register your business’ section.
The only time that this threshold does not apply is in the rare case that a business successfully applies for an exception. Exceptions can be granted when a business can demonstrate that, although it crossed the turnover threshold in one twelve month period, it won’t do so again in the next period. Even if this is the case for your business it might be worth staying registered, for reasons that we’ll explore in the next section.
Considering voluntary registration
If you don’t meet the £85,000 threshold, you may still want to register for VAT voluntarily.
Why would you want to do that? Doesn’t that mean charging people more and dealing with VAT Returns, record keeping and paperwork?
Yes it does, but there are real benefits to VAT registration as well.
The biggest is that you can claim back VAT on the goods and services that you buy for business purposes. Companies that aren’t registered have to pay the full price out of their own pockets, but if you are registered and you have proof of purchase and a clear reason for needing the goods or services for your businesses, you can claim the 20% back from HMRC. For many small businesses, this is enough of an upside to offset the admin involved with VAT returns and payment and make VAT registration worth it.
The other main benefit is less tangible, but no less important for many businesses. VAT registered status suggests to other parties that your business turns over at least £85,000 in a twelve month period, even if it doesn’t. Clients, lenders and investors may be more willing to work with you if they can see that your business is registered, creating business opportunities that you wouldn’t have had otherwise.
How to register your business
Like most things with HMRC, VAT registration is usually carried out online. You’ll need to make sure that you’ve signed up for HMRC online services or the Government Gateway if you aren’t already, but once you have your account, you can register on the government site.
Once you’ve accessed the registration portal, simply follow the steps as they come up. You’ll need some information to get through the process, so have these things ready before you start:
- Your turnover figures
- Details of recent business activity
- Bank details
The application can take two weeks or more to be fully processed and confirmed. In this time, you won’t be able to say that your business is VAT registered, but you will have to pay VAT on any transactions completed. This means that you should adjust your prices to reflect the VAT that you’re now paying as soon as you complete your registration. You should also make sure that you collect all invoices and receipts for this time period.
What to do once you’ve registered
Once your registration has been completed and confirmed, you’ll receive a certificate that tells you your VAT number, the date that you’ll need to complete your first VAT Return and payment by, and the ‘effective date of registration,’ which is either the date you crossed the £85,000 threshold and therefore became eligible for VAT payments, or the day you applied if it was a voluntary decision.
When registered, you can claim backdated VAT on goods and services that you bought in the past, paying VAT as part of their price. In order to successfully claim VAT, you need to provide HMRC with a record of the purchase (normally an invoice or receipt), a description of the goods or services, and information on why they are still relevant to your business dealings. You can’t claim VAT back on something that no longer impacts the way you do business in the present. There is also a time limit on how far back you can claim VAT: four years for goods and only six months for services. If you know you want to claim VAT back on services and you’re not yet registered, it’s important to make sure that you register soon so that you don’t miss out on that window.
published under Tax and Legislation Guides
