Your business must register for VAT with HM Revenue and Customs (HMRC) if, over the past 12 months, your ‘taxable supplies’ (closely based on your sales or turnover, not your profit) have exceeded the VAT registration threshold. This applies to all commercial businesses, whether you’re operating as a sole transfer, limited partnership, limited company or another business structure.
For the 2020/21 tax year, the VAT registration threshold is set at £85,000, but can change each year. It’s calculated on a rolling basis, so you’ll need to monitor your taxable turnover for a rolling 12 month period, not just in the current tax year, your last financial year or the calendar year. If the total of your turnover over the last 12 months exceeds £85,000 at any point, you’ll need to register for VAT.
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In the 12 months ending 31 July 2020, XYZ Services Ltd has turnover of £80,000, their highest rolling annual turnover to date. Because that’s still under the VAT registration threshold of £85,000, at that point there’s no need for the company to register for VAT, as long as they don’t have the expectation that taxable turnover will reach the limit in the coming month.
While August is quiet, September is a really successful month for XYZ Services Ltd, and sales significantly increase. Looking back from the end of September 2020, annual turnover now stands at £88,000. Having exceeded the VAT registration threshold, it’s now time for the business to register for VAT.
You must register within 30 days of the end of the month in which you exceed the registration threshold, so it’s important to keep a close eye on your turnover on at least a monthly basis, particularly as you approach the threshold. In the above example, as the threshold was breached on 31 August 2020, VAT registration must take place by 30 September.
What are ‘taxable supplies’?
‘Taxable supplies’ are any goods and services that are subject to VAT at any rate, including those items that are zero-rated. Total taxable supplies are therefore the total value of everything you sell that isn’t exempt from VAT. As most businesses will not supply VAT-exempt goods or services, your taxable supplies will typically be the same as your turnover or gross sales.
According to HMRC, the total value of sales for this purpose also needs to include:
- Any goods you’ve hired out or loaned to customers
- Any business goods that are used for personal reasons
- Any goods you’ve part-exchanged, bartered or given away as gifts
- Any services you’ve received from businesses in other countries that you’ve needed to ‘reverse charge’
- Building work of over £100,000 in value that your business undertook for itself
You must also register if you expect the value of your non-exempt turnover to exceed the £85,000 in the next 30 days, with the 30 day period again applying on a rolling basis. You need to register by the end of the 30 day period, but the registration is effective at the start of it – when you first formed the expectation that your business would exceed the VAT threshold.
DEF Building Supplies Ltd sell a range of building materials. Typically, their monthly turnover is only £5,000, so their annual sales are around £60,000. On a rolling annual basis, sales have never exceeded the VAT registration threshold so there’s been no need to register.
In September 2020, having been let down by another supplier, one of their customers places a single order valued at £90,000, hopefully the first of many. It’s to be processed and settled over a couple of weeks. This will mean that DEF Building Supplies will exceed the VAT threshold over the next 30 days, so they’ll need to register for VAT straight away so the large order will be subject to VAT.
If you take over an existing business which is registered for VAT, you may also need to register. If the combined taxable turnover of the two businesses in the last 12 months exceeds the VAT registration threshold, you’ll be required to register.
Where your business is not solely focused on the UK, there are further reasons why you may need to register:
Distance selling, the most common example of which is mail order sales, applies when a taxable person in an EU Member State supplies and delivers goods to a customer in the UK who is neither registered for VAT nor liable to be registered.
You must register if, in any calendar year, the value of your distance sales breach the distance sales threshold, which is currently set at £70,000. If you make distance sales of excise goods (like alcohol or tobacco) into the UK, you’ll need to register for VAT regardless of the value of those sales.
Acquisitions can be applicable if your business doesn’t make (or intend to make) taxable supplies in the UK, but receives goods from another EU country.
You’ll need to register if, at the end of any month, your total acquisitions from other EU statements goes over the registration threshold of £85,000 or acquisitions in the next 30 days will take you over the threshold.
Non-residents without a UK establishment
If you’re not normally resident in the UK and don’t have a UK establishment – or, for a company, aren’t incorporated in the UK – then you must register for VAT as soon as you supply any goods or services to a UK customer (or will do in the next 30 days). The usual thresholds do not apply: registration is required immediately.
For more information on these international elements, refer to the detailed information available on HMRC’s website. This regime may later be amended by the UK’s decision to leave the EU, and we’d encourage any business trading internationally to take personalised advice from their accountant.
As long as everything you sell isn’t exempt from VAT, you can still register voluntarily – even if your turnover is less than the VAT threshold. There are advantages and disadvantages of voluntary registration, and the decision whether to register will depend on the circumstances of the individual business. We’ll look at the option of voluntary registration in another article.
Applying for a VAT registration exception
It’s possible your business will cross the VAT threshold, causing an obligation to register, but you have strong reasons to believe this will only be temporary. In this case, it’s possible to request a registration ‘exception’ which means you don’t need to register for VAT. This is something you must actively apply for – it’s not sufficient to do nothing and argue the case later.
To apply for permission not to register, you must write to HMRC and explain the circumstances. You’ll need to provide good reasons why you shouldn’t have to register, which may mean:
- Demonstrating that crossing the VAT threshold on this occasion is a one-off event; and
- Explaining why there’s no likelihood that the threshold will be exceeded in the foreseeable future.
You’ll need to provide documentary evidence to support your arguments.
HMRC will consider your application and confirm in writing if you are excepted from registration. If they reject your case, you’ll have to register the business for VAT.
Even if your application for a VAT exception is accepted by HMRC, it’s important to remember that it’s a one-off rather than a continuing exclusion. If your circumstances change and your turnover again exceeds the VAT threshold, you’ll need to register for VAT (or apply for a further exception).
What happens if I don’t register on time?
You must register within 30 days of your turnover reaching the VAT threshold or of forming the expectation that it will be reached in the next 30 days.
If you fail to do so, you’ll still be expected to pay everything you owed from the date registration should have been effective, perhaps with interest added. HMRC are also likely to apply a penalty, linked to how much tax you owe, how late the registration is and the circumstances of the case.
You may be able to negotiate with HMRC to reduce or cancel a penalty in its entirety if there are genuine circumstances that prevented you from registering for VAT on time. But you’re most unlikely to get sympathy if you’ve simply waited until the end of a quarter or your financial year to review your taxable turnover, so take care to check it at least on a monthly basis.
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A previous version of this article was first published in 2017.