Value Added Tax or VAT is a taxation applied against the sale of good and/or services with rates varying dependant on the types of good/services, special considerations and government guidelines for specific exceptions and areas of economic and/or social interest.
VAT thresholds
The VAT registration threshold in the UK currently stands at £85,000. If your business’ annual turnover exceeds this threshold you have to register for VAT. If you fail to do so within 30 days, you could receive a fine.
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This figure is liable to change so it’s important to remember this when compiling your return. The VAT thresholds have changed in recent years:
VAT registration and deregistration thresholds | | From 1 April 2017 | From 1 April 2016 | From 1 April 2015 | From 1 April 2014 | From 1 April 2013 |
| Registration threshold | £85,000 | £83,000 | £82,000 | £81,000 | £79,000 |
| De-registration threshold | £83,000 | £81,000 | £80,000 | £79,000 | £77,000 |
You can use accounting software to keep an eye on your turnover and set up an alert to warn you if you’re approaching the VAT threshold.
You should also note that this figure is calculated on a rolling 12-month basis (the last 12 months from any given point) and is not based on turnover in a calendar year.
So, if your turnover exceeds the VAT threshold of £85,000 then you must register for VAT. However, you can also voluntarily choose to register your business.
Registering for VAT can ensure that you are ready to grow as a business thus creating a positive impression about your intent and allows you to reclaim VAT on purchases you make.
VAT registering benefits
As stated above if your business falls above the VAT threshold then registering for VAT is vital to stay within the law. However, VAT isn’t just a matter for larger businesses and it’s definitely worth weighing up the pros and cons of this.
Pros:
- You can reclaim any VAT that you are charged when you pay for goods and services. The VAT you pay, know as ‘input tax’, and could end up being more than the VAT you collect from your customers, the ‘output tax’. If your input tax is more than the output tax, you can collect the difference back from HMRC, saving you some money.
- It’s all about growing your business. By registering for VAT, you’ll avoid having to watch out for the threshold and it sets the tone that your business is ready to expand. You can earn respect and recognition by registering too. If you’re not registered for VAT, other companies will know that your turnover is below a certain level and they may choose to make assumptions about your business based on that.
Cons:
- End up paying more to HMRC. This is if your ‘output tax’ is more than your ‘input tax’ – the reverse of the scenario stated above.
- Spending more time on paperwork. VAT is a tax collected by businesses on behalf of the Government and you’ll need to file a return, adding to your potential workload. (This is where good accounting software can help)
- Passing on higher prices to customers, especially if you typically deal with the general public and not VAT registered businesses (who can claim back their VAT).
- If your turnover is below the VAT threshold, it’s important to weigh up the pros and cons carefully for your situation.
Different VAT schemes
There are a number of different VAT schemes open to businesses and so it’s important to consider which is best for your circumstances. Typical schemes include:
- The Flat Rate Scheme: This is for businesses with a turnover of less than £150,000. Under this scheme you pay a percentage of your turnover to HMRC, with set rates for individual industries, but can’t claim back VAT you incur on purchases.
- Cash Accounting Scheme: This is common among small businesses, as you only need to pay HMRC the VAT income you’ve actually received during a quarter. This does, however, mean that you can’t claim VAT back for any invoices that haven’t been paid. Businesses have to have a turnover below £1.35 million to be able to access this scheme.
- Annual Accounting Scheme: Instead of making quarterly returns, this scheme lets you make advance payments towards your bill throughout the year. You then file one VAT return and pay the balance, or alternatively claim back a refund for any overpayments. This is only eligible for businesses with a turnover below £1.35 million.
Although these are the main options there are a number of VAT retail schemes for businesses in that sector.
Registering for VAT
Before you log on and begin your registration for VAT, you need the following information to hand:
- Your Unique Tax Reference. This is a ten-digit number you’ll have been sent when registering to pay Corporation Tax.
- Your business’ bank account details.
- Your company number and registered address.
- Details of any associated businesses from the past two years.
- You might also need the details of any businesses being transferred or bought, if applicable.
When you register for VAT, you should receive VAT registration certificate (VAT4). This will state:
- Your VAT registration number
- The date you need to submit your first VAT Return and payment by
- Your ‘effective date of registration’
- You will quote your VAT registration number on any receipt or invoice in which VAT is applied to goods and services.
For more information on VAT registration you can visit the HMRC website.