VAT, or Value Added Tax, is one of the things all businesses need to be aware of. It’s important, for example, to understand what the ‘VAT threshold’ is and when you need to register for VAT. It’s also important to consider what benefits you might get from registering even if you are below the threshold. This guide aims to address these key points and answer the questions you might well have about VAT registration for your business.
What is the VAT threshold?
The VAT registration threshold in the UK currently stands at £85,000. If your business’ annual turnover exceeds this threshold you must register for VAT. If you fail to do so within 30 days, you might face a fine.
It’s important to recognise that this figure is liable to change. The VAT threshold for 2016 was £83,000 and this has risen steadily from £77,000 in 2012 and £64,000 in 2007. You should check what the threshold is for each financial year so that you’re up to date.
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.
Do I need to register for VAT?
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 – creating a positive impression about your intent – and allows you to reclaim VAT on purchases you make.
What are the benefits of registering for VAT?
Clearly, 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 bigger businesses and it’s definitely worth weighing up the pros and cons of this.
On the plus side, becoming VAT registered means that:
- You can reclaim any VAT that you are charged when you pay for goods and services. The VAT you pay, know as ‘input tax’, 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.
- You’re ready for growth. By registering for VAT, you’ll avoid having to watch out for the threshold and it sets the tone that your business is braced 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.
Yet, on the down side you might:
- End up paying more to HMRC. This is if your ‘output tax’ is more than your ‘input tax’ – the reverse of the scenario outlined above.
- Have to spend 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)
- Have to pass 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 and seek professional help if you are unsure.
Which VAT scheme should I use?
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 claim back a refund for any overpayments. This is only eligible for businesses with a turnover below £1.35 million.
These are the main options, although there are a number of VAT retail schemes for businesses in that sector.
What you’ll need to register for VAT
If you want to register for VAT then this can be done online in most cases (or by using paper form VAT1). Before you log on and begin your registration, 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.
Useful information on VAT
Here are some links to some more useful information that should help you to better understand VAT for your business:
- Check out our VAT calculator to help you work out the amount you should add or reclaim
- Read about why it’s important to check VAT numbers and how to do it
- Use our accountants directory to find a service to help your business – and read our article about why you need an accountant
- Read more about VAT registration on the Government’s website
- Call HMRC on 0845 010 9000 if you have any further questions about VAT thresholds or VAT registration.