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If you’re a VAT registered business then you are essentially an unpaid tax collector. You have to add VAT at the appropriate rate to everything you sell (usually at 20%). This additional income isn’t yours – you’re collecting it on behalf of HMRC (HM Revenue & Customs). Every 3 months you need to pay over the VAT you’ve collected to HMRC.
Now, here’s the good bit. When you buy items from another VAT registered business – they have to charge you VAT. But you can claim this back.
So, let’s assume that in a 3 month period you collect £1,000 in VAT from your customers. In the same period you also buy something from a supplier and you’re charged £200 + VAT (Total: £240).
The amount you have to give to HMRC is the VAT you’ve collected (often called “Output VAT”) minus the VAT you’ve paid out (“Input VAT”) . So in this example you’ll be handing over £960 (1000 minus 40).
You’re essentially £40 better off than you would have been if you weren’t VAT registered.
Value Added Tax (VAT) is charged on the majority of goods and services provided by VAT-registered businesses in the UK, as well as certain goods and services imported from non-EU countries, and those imported into the UK from other EU countries. VAT-registered businesses add VAT to the sale price of goods and services when they sell to commercial and non-commercial consumers.
They are also usually able to reclaim the VAT they have paid when buying goods or services. If they are not registered for VAT, they cannot reclaim any of the VAT they pay. You have to be registered for VAT to charge or reclaim it on anything you sell or purchase.
You must register for VAT with HM Revenue and Customs (HMRC) if your business’ VAT taxable turnover is more than £85,000.
You can register voluntarily if your turnover is less than £85,000, unless everything you sell is exempt. You’ll have certain responsibilities if you register for VAT.
VAT taxable turnover is the total value of everything you sell that isn’t exempt from VAT.
What to include
To check if you’ve gone over the threshold in any 12-month period, add together the total value of your UK sales that aren’t VAT exempt, including:
Include any zero-rated items – only exclude VAT-exempt sales, and goods or services you supply outside of the UK.
Your VAT responsibilities
From the effective date of registration you must:
You must also register for VAT if:
By doing this you’ll register for VAT and create a VAT online account (sometimes known as a ‘Government Gateway account’). You need this to submit your VAT Returns to HM Revenue and Customs (HMRC).
You can appoint an accountant (or agent) to submit your VAT Returns and deal with HMRC on your behalf.
When you receive your VAT number from HMRC, you can sign up for a VATonline account (select option ‘VAT submit returns’).
If you fail to register for VAT at the appropriate time you will be liable to a penalty – and this is calculated at 5%, 10% or 15%, depending on the delay between the date of hitting the threshold and the date which HMRC received registration notification. Up to 9 months delay incurs a penalty of 5% then up to 18 months is 10% and over 18 months is 15%. You should keep a copy of your registration notification as postal delays could affect the date on which HMRC receives it – as a penalty can be mitigated or cancelled in total if there are genuine circumstances which prevented you from submitting your application on time.
Even if you don’t have a legal requirement to register (i.e. your annual turnover hasn’t exceeded the VAT threshold), you may voluntarily decide to register for VAT.
If you are VAT registered, you can claim back VAT you’ve paid on any business purchases. If your sales comprise zero-rated goods or services and you purchase standard-rated items you would be able to claim a VAT refund from HMRC. Even if you’ve not made any sales, you could still claim the VAT back on your purchases.
If you are registering voluntarily, you might even be able to reclaim some of the VAT you paid when you were setting up your business even though you weren’t VAT-registered at the time.
another potential benefit of being VAT-registered is that it may help give the impression that you run a larger company than is really the case, and this may enhance your image with clients.
Deregister for VAT
if you register for VAT and your circumstances subsequently change, it may be possible to deregister your business. While this should be a simple process, many firms report difficulties in persuading HMRC to agree to their request.
You can deregister your business if its turnover or taxable supplies will not exceed the threshold in the next 12 months. If you registered voluntarily and your business has not yet reached this threshold, HMRC should have no objection to your deregistration. But if your turnover has previously exceeded the threshold, you may have difficulties persuading HMRC that it will fall within in during the coming year.
You are obliged to deregister your business if it stops making taxable supplies altogether, or if it becomes part of a group. You may also have to deregister if the legal structure changes, or if the business is sold – although the new owner can choose to keep the registration number in some circumstances.
Let’s explain the first point in more detail, using a retailer as an example:
If a retailer’s customers are generally other VAT-registered businesses, they will not mind whether they are charged VAT, because they can obtain a refund from HMRC.
So the business is probably better off registering for VAT because it can recover the VAT on its purchases. And this tactic isn’t at all risky or dishonest – it’s estimated that around 20% of all VAT-registered businesses trade below the VAT registration threshold.
However, if a retailer’s customers are the general public (who are not VAT-registered), then they cannot recover the VAT. Therefore, the VAT is an additional cost to the public and inflates the retail price. If the retailer’s rivals are not VAT-registered, his prices won’t be as competitive.
When should I register for VAT?
What is VAT?
Value added Tax (VAT) is a tax on certain purchases made by both businesses and individuals, along with imports into the UK. VAT is charged on the majority of goods and services provided by VAT-registered businesses in the UK, as well as certain goods and services imported from non-EU countries, and those imported into the UK from other EU countries.
If your business is VAT registered then you should add VAT at the appropriate rate to goods or services you sell (usually 20% but the percentage can vary) and then pay this to HMRC quarterly when you complete a VAT return. You can also claim back the VAT on purchases you have bought from other VAT registered businesses.
You must register for VAT with HMRC if your business’ annual VAT taxable turnover is over the threshold which is £85,000 for 2017/18. The threshold usually goes up on 1st April each year and is announced in the annual budget. If you are not legally required to register for VAT you can decide to register voluntarily.
How to register?
Most businesses can register online and create an online VAT account; you can then use this to submit your VAT returns to HMRC.
At Crowther, we can submit your VAT returns and deal with HMRC on your behalf regarding your VAT returns. If this is something you are interested in please contact Danielle Sharp our VAT and bookkeeping manager, you can call the office on 01484 515544 or email firstname.lastname@example.org .
Once you’re registered you will be responsible for charging the correct amount of VAT on invoices to customers and paying any VAT due to HMRC. We’ll calculate the amount due, ensuring that you’re on the correct VAT scheme (e.g. standard/ flat rate/ limited cost trader).
If you are legally required to register for VAT and fail to register for VAT at the appropriate time you may be liable to a penalty.
Advantages of registering
Registering for VAT could benefit your business as it would enable you to claim VAT back on your purchases even if you have not made any sales or if your sales comprise zero-rated goods or services. If most of your customers are VAT registered then they will receive a refund from HMRC for the VAT charged on your sale prices when filing their own VAT return. Being VAT registered could also enhance your image with clients by giving the impression of being a larger more established business.
Disadvantages of registering
If your business is not legally required to register for VAT there could be some disadvantages of voluntarily registering. Adding the additional 20% VAT to goods and services will increase prices of your goods/services for customers, so it’s important to consider your customers when deciding to register for VAT. If your customers are not VAT registered they will not be able to reclaim the VAT, therefore businesses which are not VAT registered will seem to have more competitive prices to these customers. Alternatively your business could absorb the cost of the VAT charged on your goods for sale to keep prices the same for customers to prevent losing customers, however this would reduce profit. So you may choose not to register voluntarily.
There is the option to deregister if your business’ VAT taxable turnover will not exceed the threshold in the next 12 months.
At Crowther Chartered Accountants, we can help you every step of the way when it comes to registering for VAT, submitting VAT returns and keeping VAT records and a VAT account. Our friendly, professional staff are here to answer your questions and queries regarding every aspect of your accounts. If you have any questions about registering for VAT or about the accountancy services we offer at Crowther Chartered Accountants, please feel free to get in touch. You can call the office on 01484 515544 or email email@example.com
Author’s Charlotte Skayee and Harjot Rothore