Value Added Tax (VAT) is an indirect tax charged on goods and services which is collected by businesses on behalf of HMRC.
When you need to register for VAT:
- When your VAT taxable turnover exceeds the threshold of £85,000 in a 12-month rolling period or;
- If within a 30-day period you are likely, or will, exceed the £85,000 VAT taxable turnover threshold.
These two points fall into the compulsory VAT registration category, which means that you have to register for VAT. There may be times where your company might not fall into this category but it is beneficial to voluntarily register for VAT, for example, if you were in a VAT refund position.
As a side note, there are other scenarios where you should register for VAT but for this blog post, I am going to focus on the above two.
So, what do I mean by VAT taxable turnover?
Basically, this is everything you have sold/services provided (exclusive of VAT because at this point you wouldn’t be registered yet) less everything sold/services provided that is VAT exempt or outside of the scope of VAT. Take a look at HMRC’s VAT taxable turnover calculator to see what is and isn’t included.
What is a 12-month rolling period?
A 12-month rolling period is not a fixed period of time. So it’s not a tax or calendar year. I would check the 12-month rolling period each month to check if you have reached the threshold of £85,000.
So what this means is, when you get to the end of Feb 2021 you look back at the previous 12 months VAT taxable turnover (Mar 2020 – end of Feb 2021) to see if you will exceed the threshold. Then again when you get to the end of the March, you will look back at the period Apr 2020 – end of March 2021.
What happens if I reach the threshold within the 12-month rolling period?
You will need to register for VAT within 30 days of the end of the month when you reach the threshold. The effective date of registration will then be the first day of the second month after you reached the threshold.
Using the same example, if you reach the VAT threshold in Feb 2021 your effective registration date would be 1 April 2021, as HMRC allows you 30 days from the end of Feb 2021 (the month in which you exceeded the threshold) to register.
What happens if I reach the threshold within a 30-day period?
This situation is a little bit different to than if you exceeded the threshold within a 12-month rolling period. Your effective date of registration will be the date you realised you would reach the threshold and not the actual date that you reached the £85,000 threshold. You will have to register for VAT before the end of the 30-day period.
Going back to our example, if you realised on 18 Feb 2021 that you could exceed the VAT threshold by the end of Feb 2021 (might be because of a large sale invoice), you have 30 days from the 18 Feb 2021 to register for VAT. However, your VAT registration date will be dated 18 Feb 2021, the date you realised that you would exceed the threshold.
Be careful because there is the chance that you may be charged a penalty for late registration and you will have to pay HMRC any VAT owed from the date you should have registered. HMRC can also charge surcharges and interest on any late payments.
You can write to HMRC and request an ‘exception’ from having to register for VAT if your VAT taxable turnover will only temporarily exceed the threshold of £85,000. You will need to have evidence that over the next 12 months your VAT taxable turnover will not exceed the VAT deregistration threshold of £83,000. HMRC will then review your request and write to you on the outcome.
This is the address for HMRC:
HM Revenue and Customs
Once you have registered with HMRC, they will issue you with a VAT certificate which includes:
- VAT number
- The effective date of registration
- When to submit your first VAT return and payment
Top tip: make sure to keep this in a safe place – because you’re going to need it !!
Changes to your bookkeeping now that you are VAT registered
Just remember that until you have your VAT number you can’t charge or show VAT on your sales invoices, even though you may have to pay VAT for this period. The best practice is to speak your customers first explaining that you are registering for VAT and you will be increasing your prices for this period. You can then re-issue your invoices to your customers with your VAT number once you have received the VAT certificate from HMRC.
Now that you are VAT registered you have the following responsibilities
- Charge the correct VAT amount (do your research)
- Submit your returns on time
- Pay any VAT due on time
- Keep records and use a VAT control account
- Comply with Making Tax Digital (MTD)
MTD involves keeping digital records and using accounting software to complete and submit your VAT returns to HMRC.
Hope that you have found this useful, I have some upcoming VAT blog posts, so feel free to subscribe if you want me to let you know when they are out.