Any UK business must register for VAT if it is making taxable supplies in the “course or furtherance of a business” and its taxable turnover is above the threshold for registration (currently £70,000). A business must have one VAT registration for all the activities that it engages in. A partnership also has one registration for all its businesses, but if there are two separate partnerships running different businesses and the partners are not all the same in each partnership, then both partnerships must register separately for VAT.
A limited company must have its own VAT registration, but it can become part of a group VAT registration where companies under common control group together and appoint a representative member to deal with the group’s VAT affairs. Other types of organisation, including clubs, societies and charities, must also register provided that they are carrying on a business with taxable supplies above the registration threshold.
A business must register if the taxable turnover (standard, reduced and zero rated sales) has reached £70,000 in the past twelve months, unless the business can show that its taxable turnover will be less than £68,000 in the next twelve months.
The business must also register if there are “reasonable grounds” for believing that the taxable turnover in the next thirty days will exceed £70,000 or if the business takes over (as a going concern) another business that is above the registration limit. This rule is designed to ensure that a business registers if it is about to engage in a large transaction such as a property deal. Where the forthcoming transaction is standard rated, the business must inform HMRC when the completion date of the transaction is less than thirty-one days away.
A business whose taxable turnover exceeds the registration threshold may be able to avoid having to register for VAT if it can persuade HM Revenue and Customs (HMRC) that it has only exceeded the threshold as a result of a once-off transaction and that in future its turnover will return to the previous lower level.
Generally, a business in its first period of trading would be expected to look at its turnover on a monthly basis and calculate the total taxable turnover for the previous twelve months. When it reaches the point where its taxable turnover has exceeded the registration limit within the previous twelve months, the business must notify HMRC within thirty days, and they will ensure that the registration is effective from the end of the month following that in which it exceeded the registration threshold.
A business in another European Union member country must register if it makes distance sales to the UK exceeding the £70,000 threshold. A business that is based outside the European Union and is supplying services electronically (for example relating to software, website design or distance learning) to private customers within the EU must register for VAT in the EU, but can choose in which EU member state it registers. The customers are then charged VAT at the rate applicable in the EU country where the supplier is registered.
Where an unregistered UK business buys goods from other EU member states that are above the registration limit in a calendar year, that business must then register for VAT in the UK. This might occur where for example the sales of the business in the UK are exempt and it has not previously been required to register. This provision is intended to prevent companies gaining an unfair advantage by purchasing from other EU states with a lower rate of VAT.
A business whose taxable supplies are below the registration threshold can register for VAT voluntarily. This may be beneficial because an unregistered business, although it does not have to account for VAT on its sales, is still paying VAT on purchases and expenses which it cannot reclaim.
A business making mainly zero rated supplies may register so as to reclaim VAT paid. It may also be favourable to register voluntarily where most of the customers of a business are registered and can fully recover the VAT.
Voluntary registration involves additional administrative tasks which a small business must take into account before choosing to register.
VAT return periods
When registering for VAT, a business can ask HMRC to ensure that its quarterly return periods coincide with its accounting year end, to simplify administration. If a business will be receiving VAT repayments, it can request monthly returns, so the VAT can be recovered more quickly and assist the cash flow of the business.
Where the taxable supplies made in the last twelve months have fallen below £68,000 the business can deregister. A business is required to deregister if it ceases to make taxable supplies. Also, it may ask to deregister if outputs during the past twelve months have fallen below the £68,000 deregistration limit, or if it can show that its taxable supplies in the next twelve months will be below that limit.
A business is also permitted to deregister if its taxable turnover is above the deregistration limit but its supplies are zero rated, so that it is receiving VAT repayments. However in this situation a business may wish to continue being registered and receiving the repayments, unless the administrative cost of keeping VAT records outweighs the benefit of the repayments.
Where a business deregisters, it must account for the VAT relating to its assets, unless the total VAT involved is less than £1,000. The assets may include stock, commercial vehicles, plant and equipment. The business may also have to account for VAT on its land and buildings if VAT was recovered on these when they were acquired, provided that they are less than three years old or the option to tax has been exercised in relation to them.
HM Revenue and Customs www.hmrc.gov.uk
“Value Added Tax” by Andrew Needham and Steve Allan, Bloomsbury Professional, 2009