Value Added Tax (VAT) is charged on a wide variety of products and services and must be paid to HMRC by VAT-registered businesses. In essence, as a VAT-registered business, you act as a tax collector on behalf of HMRC, paying the amounts collected directly to them, normally on a quarterly basis. Most businesses operating in the UK are required to charge and pay VAT, however, some are exempt due to the types of products and services they provide and their level of turnover. In this article, we will explain which businesses are required to register for VAT, which businesses are exempt from VAT, and how to register for VAT in the UK.
Do I need to register for VAT in the UK?
Your business will need to register for VAT on a compulsory or voluntary basis, or it may be exempt altogether. It is essential to understand which category your business falls into and keep this under review to ensure that you continue to meet your tax obligations.
When does compulsory VAT registration apply?
It is a compulsory requirement that your business registers with HMRC for VAT if your turnover exceeded £85,000 (this is referred to as the “VAT threshold”) in the last 12 months or if you expect to reach this point in the next 30 days. Turnover should be calculated at the end of each month for the previous 12-month period.
When does voluntary VAT registration apply?
If your business has a turnover below the VAT threshold, you can choose to register for VAT if you wish. Businesses may choose to register for VAT because of the advantages offered, including the ability to reclaim VAT on expenses paid. This can be especially advantageous for businesses that only supply zero-rated goods and services, as they can reclaim VAT without charging VAT to customers.
Does all turnover count towards the VAT threshold?
Not all turnover counts towards the VAT threshold. To calculate if your business meets the VAT threshold, you will need to work out the total value of all the taxable supplies made in the UK (this includes the Isle of Man), including:
- Standard-rated goods and services (20%)
- Reduced-rated goods and services (5%)
- Zero-rated goods and services (0%)
- Reverse charge services received from overseas.
- Goods hired or loaned to customers
- Business goods used for personal reasons
- Goods bartered, part-exchanged or gifted
- Building work to a value over £100,000 that your business undertook for itself
You do not need to include supplies that are deemed to be exempt and outside the scope of VAT. VAT-exempt supplies include land, insurance, postal services, education, training, finance, health and welfare, sport, gaming, culture, charitable fundraising, and antiques.
In addition, certain goods and services are considered “out of scope” for VAT, including:
- goods or services you purchase and use outside of the UK
- statutory fees, e.g. city congestion charges
- goods sold as part of a hobby, and
- donations to a charity (if given without receiving anything in return)
Do I need to pay VAT if my business is based outside the UK?
The tax rules state that a business must register for VAT if they are based outside the UK and supply goods and services to the UK (or will do in the next 30 days).
How do I register for VAT?
Most businesses operating in the UK can simply register for VAT on the HMRC website. At the start of this process, you may need to create a Government Gateway account which you can later use to submit your VAT returns to HMRC and pay any VAT owed. You can choose to register your business for VAT yourself or ask an agent to do this on your behalf.
It is also possible to register for UK VAT by post by completing and submitting form VAT1 to HMRC. You will need to register by post if you want to apply for a “registration exception”, join the Agricultural Flat Rate Scheme or register parts of a body corporate under different VAT numbers.
When completing the VAT registration form, you will be asked to provide details relating to:
- The person making the VAT declaration and their signature
- Where your business is based
- The type of business (i.e. sole trader, general partnership, limited partnership, body corporate, limited liability partnerships, charity, trust, registered society, or unincorporated society)
- Business contact details
- Whether you are applying for voluntary or compulsory VAT registration
- Whether you have exceeded the VAT threshold in the last 12 months or expect to in the next 30 days
- Turnover, and
- Activities carried out by the business.
A key part of the VAT registration process is selecting the appropriate VAT accounting scheme for your business. There are four main types of VAT accounting scheme:
- Standard VAT accounting: this scheme is used by the majority of businesses. Using this method, you charge and collect VAT for each sale you make, prepare and submit a VAT return each quarter (or year), and pay the amounts collected to HMRC within the required period.
- Annual VAT accounting: a VAT return is prepared and submitted to HMRC every 12 months, but VAT payments are made quarterly based on the last return.
- Flat-rate VAT scheme: for smaller businesses, it may be possible to register for the flat-rate VAT scheme. Using this method, you simply pay a percentage of your turnover to HMRC as VAT. It is important to note, however, that if you register for flat-rate VAT, you will not be able to reclaim the VAT on your purchases (with the exception of some capital assets with a value in excess of £2,000). The exact flat rate you pay depends on the type of business. If you wish to join the flat-rate VAT scheme, you can do so online or complete for VAT600 FRS.
- Cash VAT accounting: Using this method, HMRC make the assumption that you collect or pay VAT when money is exchanged rather than when you raise an invoice for your goods or services. The benefit of this method is that VAT is only paid when you receive payment of your invoices. To use cash accounting, you must be registered for VAT and have an estimated VAT taxable turnover of £1.35 million or less in the next 12 months. HMRC advises that you do not need to tell them if you wish to use cash accounting.
What happens once I have registered for VAT?
Once you have completed the VAT registration process with HMRC, you will receive:
- Your VAT number
- Details about when and how to submit your first VAT return and payment
- Your VAT registration date (“effective date of registration”)
These details will be available in your online VAT account or sent to you in writing if you post your application. The effective date of registration is the date when your business can start charging VAT and reclaiming VAT paid on your business expenses. The amount of VAT that can be reclaimed in each period is deducted from the amount of VAT you owe, hence reducing the final amount you need to pay HMRC.
Once you are registered for VAT, you must add VAT where applicable to your prices, include VAT on all invoices sent to your customers, prepare and submit a VAT return to HRMC each quarter or year, pay the amount owed to HMRC, and keep digital VAT records. Digital VAT records include records of your sales and purchases, a summary of your VAT, and your VAT invoices. These must be stored for a minimum of 6 years and be accurate, complete, and readable.
If your circumstances change in the future and your business is no longer eligible to be VAT registered, you will need to apply online to HMRC to cancel your VAT registration. This may be required; for example, if you cease trading, you stop selling VAT-taxable goods and services, or your business joins a VAT group. The rules state that you must cancel your VAT registration within 30 days from the date when you cease to be eligible, or you risk being charged a penalty.
Registering for VAT can confer considerable advantages to businesses operating in the UK, including the ability to reclaim VAT on expenses paid. Indeed, you can even claim a refund of VAT on items purchased up to fours ago if you are still using them. Thankfully, the HMRC has made the process of registering for VAT, submitting VAT returns, and paying VAT quarterly or annually extremely straightforward and efficient. Your accountant can handle all aspects of your VAT returns on your behalf, including working out the final balance you need to pay. VAT must then be paid no more than one month and seven days after the end of the VAT period.
At Uniwide Formations, we have a team of experts who are experienced in forming UK companies. Our specialists can take care of all the paperwork and registration of your limited company. We can also help you with VAT registration for your company.