How do I know when VAT registration is required?

A question we often get asked is, “Does my business need to be VAT registered?” Frequently, the answer is not as simple as ‘yes’ or ‘no’. You will need to register for VAT if;

• Your business taxable turnover for any consecutive 12-month period exceeds the VAT threshold (£85,000 for 2018/19).
• You take over a business that is already VAT registered. One way to test if you need to be VAT registered is to calculate your taxable turnover over a 12-month period and add it to the taxable turnover of the business you are buying. If it exceeds the VAT threshold, you are obliged to be registered.
• You think your taxable turnover will exceed the VAT threshold in the next 30 days.

If your business is obliged to be VAT registered and you fail to do so, you could be liable to a penalty.

As well as being obliged to register for VAT, businesses can voluntarily choose to be VAT registered.

Voluntary VAT registration
It may sound strange that a business voluntarily registers for VAT. Why would they want the extra hassle of calculating a quarterly VAT return and organising payment of liabilities to HMRC? Well, in certain cases it can be beneficial for a business to be VAT registered:

• If the customers of the business are predominately VAT registered businesses, they can reclaim the VAT charged to them.
• If the business is in a repayment position with HMRC e.g. it mainly makes zero rated supplies

If you’ve decided that you need or want to be VAT registered there are plenty of VAT schemes, UK companies can utilise to reap the benefits of VAT, here are a few of them:

VAT Flat Rate Scheme
The Flat Rate Scheme is intended to simplify the process of calculating a business’ VAT liability. Instead of using the standard VAT rate (20%) the company can apply a fixed rate percentage. This fixed rate depends on the industry sector the business belongs to. There are over 50 industry sectors listed on HMRC’s website.

To be eligible to join, your company’s total taxable income must be less £150,000 per year.

As well as simplifying the process of calculating VAT returns and payments, the scheme can also help with the company’s cashflow.

Limited cost traders
From April 2017, if you are deemed to be a limited cost business, you must use 16.5% as your fixed rate percentage, regardless of your industry category.
HMRC says a limited cost business is one where the spend on goods, including VAT in a quarter, is:

• less than 2% of its flat rate turnover, or
• more than 2% of its flat rate turnover, but less than £250

For further guidance on limited cost traders, speak to a member of our team on 0845 880 5678.

VAT Cash Accounting Scheme
To be eligible to join the Cash Accounting Scheme your annual total taxable turnover must be less than £1.35 million.

Cash Accounting can help with a company’s cashflow as you only pay VAT on your sales once you have received payment. Likewise, you are only able to reclaim VAT purchases when you pay the supplier.

There are some restrictions with the scheme. You can’t join:

• If you are already using the Flat Rate Scheme
• If you are behind with your VAT returns and payments
• If you have committed a VAT offence in the last 12 months

Annual Accounting Scheme
Businesses that choose to join the Annual Accounting Scheme only have to file one tax return per year, instead of quarterly as with the schemes mentioned above.

Instead of facing a huge VAT bill at the end of the year, advanced payments can be made based on an estimate from the previous years’ return. Once the return is filed you can then make a final payment to clear what is due or claim a refund if you have overpaid.

The scheme is open to businesses whose annual taxable turnover is less than £1.35 million.

A point of caution, if you regularly reclaim VAT, this scheme may not be suitable for you as you only get one refund a year.

It is advisable to seek professional advice before joining a VAT scheme. For further guidance, get in touch with us on 0845 880 5678.

VAT and Making Tax Digital (MTD)
Making Tax Digital is one of the biggest changes to the UK tax system in over 20 years. One of its stipulations is that VAT registered businesses with a turnover above the VAT threshold must keep digital records and submit their VAT returns using software that is compatible with Making Tax Digital. This ruling applies to returns starting on or after 1 April 2019. If you have not yet given thought to this, don’t panic, you still have time to get your processes MTD compliant.

VAT is a complex area of tax. If you have any questions regarding any of the points that have been mentioned in this article, or would like further information or guidance, get in touch with us on 0845 880 5678 or email website@wrightvigar.co.uk.