VAT Registration and Threshold

VAT-Registration

Many of our users face this question. Do I need to register for VAT? Here is an article that hopefully will help you make up your mind about VAT registration.

A VAT-registered business is in a way a tax collector. It add VAT, at the appropriate rate, on top of its sales price, collect the cash and then hand it over to HMRC. It’s not only giving! The business also claims back any VAT it has incurred.

Who need to register for VAT

Let’s start with what is mandatory! The most likely scenarios where you need to register are:

Your turnover of VAT taxable goods and services for the last 12 months is more than £79,000, or you expect it to go over that figure in the next 30 days. Bear in mind the £79,000 threshold tends regularly to increase.

If you take over a business that is VAT-registered, you have to add up your VAT taxable turnover to that of the business you’re taking over. If the total is greater than the registration threshold on the day of the takeover, you will have to register.

You have received goods from other EU countries in the UK with a total value greater than £79,000 in the current year since 1 January, or you expect to acquire more than that value in the next 30 days.

Failure to register on time may lead to late registration penalties. However, if your business’ turnover exceeds the VAT registration threshold temporarily, you can ask HMRC for an exception from registration.

Who can register for VAT

An individual, a partnership, a company, an association, or a charity can register for VAT if they meet the definition of a “business”. HMRC defines a business as a continuing activity involving getting paid. For instance, you’re in business when you earn an income by carrying on a trade or a vocation. However, the activity must be frequent and continued over a period of time. For instance, selling your car wouldn’t be considered a business activity.

What if you haven’t crossed the registration threshold

Well, you can still apply to register voluntarily because it might be of benefit to you. For example:

  • if you sell zero-rated items and buy standard-rated items you would receive a VAT refund from HMRC
  • if you have not yet sold anything, you may still be able to claim VAT back on your purchases

The good news is you can apply to backdate your voluntary VAT registration by up to 4 years. Of course, you won’t be able to reclaim any VAT unless you have the right evidence. Fortunately, Keepek can help you keep such evidences.

Once you register voluntarily, you must keep all required VAT records and also issue VAT invoices. Here again, Keepek can help.

I have the choice what should I do

If you are below the radar (the registration threshold) you have to ask yourself who are my customers before deciding whether to register or not.

If your customers are mostly VAT-registered, they won’t mind being charge VAT because they will get a refund. In this case, it is better to register because you’ll be able to recover the VAT on your purchases.

If your clients are the general public, then VAT means a mere increase in price. In this case, you should be careful because your competitors may not choose to register and therefore their prices are going to be low compared to yours.

The rates of VAT

There are three rates: standard rate – 20%, reduced rate – 5%, and zero rate – 0%. There are also goods and services that are either exempt, or outside the scope of the VAT system.

The standard rate is the default one.  It is charged on most goods and services. The reduced rate is applied to goods such as installation of energy-saving materials and sanitary hygiene products. Finally, the zero-rate is applied to food, books, public transport etc.

You can find more information of rates here: http://www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm.

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