VAT - value added tax - is a tax charged on the consumption of certain goods and services in the UK. Registering for VAT ensures that businesses pay VAT on their purchases and charge customers VAT.
Registering for VAT enables businesses to work out the VAT they pay as an ‘input tax’ and the VAT they charge as an ‘output tax’.
In the current 2020/2021 tax year, businesses must register for VAT if their VAT taxable turnover exceeds £85,000.
The government has stated that this threshold will remain until March 31st 2024 at least. The VAT taxable turnover is comprised of the total turnover of all taxable goods sold by a business that are not exempt from VAT. Few goods and services are exempt from VAT.
Getting clued up on VAT registration is necessary for anyone wondering how to do small business accounting properly without incurring the wrath of HMRC. It might not be relevant just yet, but it’s tough to predict when a business will need to register for VAT - it might be sooner than you expect!
If a business calculates that it needs to register for VAT then it can register for VAT online. The process is quick and simple, making use of the Government Gateway system. Once registered, HMRC will issue the business with a VAT registration certificate that contains the following information:
- VAT number
- Details of the first VAT return
- The effective date of VAT registration
Until a business knows its VAT number, it can’t charge for VAT, even though the business will have to pay VAT for that period where it still doesn’t have a number. Some businesses choose to increase their prices during this (usually short) period.
Once a business has registered for VAT, it takes on the following duties:
- Charge VAT correctly
- Account for VAT and submit VAT returns
- Pay VAT
- Keep VAT records
- Use HMRC’s Making Tax Digital service for VAT, if applicable. Making Tax Digital seeks to end the traditional paper tax return in favour of an all-digital service that allows businesses to account for and manage taxes like VAT.
Why Register for VAT?
VAT registration is required by law when a business’s VAT taxable turnover exceeds a certain limit, which is due to remain at £85,000 until 2024. There are two situations in which this might occur:
- If a business expects its VAT taxable turnover to exceed £85,000 over a 30-day period
- If a business’s VAT taxable turnover exceeds £85,000 over the last 12 months
In either situation, the business is required to register for VAT by law.
In the first scenario, if the business exceeds the limit across 30-days then it has that 30-day period in which to apply for VAT, but VAT will be payable from the exact date the business’s turnover exceeds the limit.
For example, say a business exceeds the £85,000 limit on the last day of the month by securing a particularly large contract. Before the proceeding 30-day period is up, they’ll need to register for VAT. Their effective registration date remains the day the turnover exceeded the threshold, despite there being a 30-day gap to the end of the 30-day period.
In the second scenario, a business might exceed the £85,000 mark across 12-months. This is a much more typical scenario where a business will have to register for VAT. The business will need to register for VAT within 30-days after the month you went over the threshold. The effective registration date will be the first day of the second month the business exceeded the limit.
For example, a business has £70,000 12-month turnover that exceeds £85,000 between 28th of June 2020 and 28th of June 2021. They will need to register for VAT by the 30th of July. The effective registration date will be the 1st of August 2021.
The Benefits of Registering for VAT
Despite legalities, VAT registration enables businesses to account for VAT paid at input and output. For example, if a business pays more VAT at input when purchasing goods at services than it receives at output when it collects VAT from customers, then the business can recover the difference between the two.
Furthermore, VAT registration is an indication of your business’s turnover, and hopefully success, therefore suggesting that the business is ready for growth. When others look up your business, they’ll see it’s registered for VAT also.
Businesses are also required to deregister from VAT once their turnover falls below £83,000 in the current 2020/2021 tax year. HMRC will confirm the cancellation once the business’s details are processed and the business will then cease to account, charge or pay VAT.
VAT deregistration also applies when a business believes that it will only temporarily exceed the VAT threshold. In this scenario, the business must prove that its VAT taxable turnover won’t exceed the £83,000 deregistration threshold within the next 12-months.
VAT Accounting Software
Business accounting software like Xero helps businesses see when they’re likely to exceed the threshold for VAT registration. When it comes to VAT, the most important business accounting advice is to remain consistently on the ball when it comes to tracking VAT taxable turnover.
Once you register for VAT business accounting software will allow you to account for VAT at both input and output, also assisting the process of paying VAT or receiving tax relief on overpayment of VAT at input.
VAT accounting is not exactly one of the business accounting basics - the business requires a sufficient turnover before VAT is even a consideration. Nevertheless, it’s impossible to predict when this might happen - businesses must register for VAT promptly when necessary to avoid any sort of fine.
Registering for VAT is required by law when a business’s VAT taxable turnover exceeds £85,000 (for the current 2020/2021 tax year, and due to remain as such until 2024).
Registering for VAT is easy enough and obligates businesses to account for VAT, charge it to customers and pay it to HMRC.
This does yield an advantage in that businesses can save some tax if their input VAT exceeds their output VAT. Ultimately, for businesses that exceed the taxable VAT threshold, there is no option than to register for VAT.