Traders must register for VAT (Value Added Tax) with HMRC, if their VAT taxable income is greater than £85,000. The business receives a VAT registration certificate when they register the business with HMRC. The certificate confirms the VAT number, details for submission of first VAT return and payment, and effective date of registration. The effective date is when the business is officially subject to VAT rules. A trader can register voluntarily; apply for a VAT registration number, if the turnover is less that £85,000, except if all sales are VAT exempt. The business VAT registration certificate can be received within 14 working days, nevertheless it can take longer.
The certificate is sent either to the VAT online account or by post if it’s not an online registration or through a third party.
Compulsory Registration – Why should I register for VAT?
A Sole Trader needs to register for value added tax if:
- Taxable VAT turnover is greater than £85,000 in a 12 month period.
- Goods are received in the United Kingdom from the European Union and the value is more than £85,000.
- The trader anticipates that he will cross the threshold in the next 30 days alone.
There is a zero threshold for businesses based outside the United Kingdom; the business must immediately register for VAT if they have supplied any goods or services in the United Kingdom or anticipate doing so within the next 30 days.
A Trader may also be required to register for VAT if a business has been taken over.
Late VAT Registration
If a trader does not register for VAT within time, he is liable to pay a penalty depending on how much VAT is due for the period of the delay. As stated earlier, it is imperative for the business to register for VAT within 30 days of the business turnover crossing the threshold.
If the taxable turnover of the business goes over the threshold temporarily, the business can apply for a registration exception. A written application needs to be sent to HMRC with facts showing why the threshold will not be crossed in the next 12 months. If HMRC is convinced with the written application, they will send a written confirmation else, the business will need to register for value added tax.
VAT Responsibilities for a business
From the effective date of VAT registration the business must:
- Charge the correct VAT amount on the invoice
- Timely file VAT Returns
- Regularly clear all VAT dues to HMRC
- Maintain VAT records
Until a trader is VAT registered, he should not charge or collect VAT on sales. However, the business is liable to pay value added tax on all sales made after the effective date of registration to HMRC.
VAT Threshold Computation
The VAT taxable turnover is the full value of goods and services sold that aren’t exempt from VAT. The UK VAT threshold for registration is £85,000 (from 1 April 2017). A trader is required to register with HMRC for VAT if their total VAT taxable turnover over all their businesses exceeds this threshold in a 12 month rolling period.
To calculate if you’ve exceeded the threshold in any 12-month period, you need to add together the total value of sales of your products or services that aren’t VAT exempt, this will include the following:
- Goods that are hired or loaned to customers
- Business merchandise used for personal reasons
- Goods bartered or part-exchanged, or given as gifts
- Services received from businesses in countries that you had to ‘reverse charge’
- Building work over £100,000 your business did for itself
HMRC VAT Registration Process
Almost all businesses can register for VAT online, even partnerships; and a group of companies can register under one VAT number. Once the trader is registered online and has a VAT online account, he will need to submit VAT returns to HMRC as and when they are due. Businesses can even appoint accountants like DNS Accountants or agents to help them submit the VAT returns on time, meeting all deadlines, and interact with HMRC on behalf of the business.
It may benefit some businesses to be VAT registered as they can recover the VAT on assets and overheads, especially if their sales are zero rated e.g. farmers.
The basic rule for VAT return preparation is to record the VAT on the accruals basis i.e. record each individual sales and purchase invoice based on invoice date and then report the total for the VAT period (monthly, quarterly or annually as you choose). However, there are various VAT schemes you may choose to join that may make life simpler, aid cash flow or even pay less VAT. Here are a few to think about but your accountant will help you assess which is best for you:-
- Cash accounting – you record and/or report VAT based on payment date not invoice date
- Flat rate scheme – account for VAT on sales and assets only – not purchases
- Second Hand Margin Scheme – account for VAT on profits not sales and purchases
- Retail Margin scheme – account for VAT pro-rata on total takings when selling goods at different VAT rates
VAT Registration Check – How long does it take to get a VAT registration number?
Usually, HMRC takes a month to process VAT applications, but it can take longer if HMRC needs to carry out further checks. The government of the United Kingdom claims that it can even take as little as 14 working days to process an application. HMRC intends to process 70% of applications within 10 business days and most are processed within 30 days.
From the time of applying for VAT registration and getting the VAT registration number, the business must keep account of and pay all VAT dues. The business becomes liable to keep records of all the invoices from the time of voluntary registration for VAT. It actually does not matter when the business applied for registration or the date the VAT registration number was received. Business can reclaim any VAT paid on purchases from the date of registration. To do so, records of all inwards invoices from suppliers need to be maintained.
Your first VAT return
Once you have registered for VAT, then you will receive your VAT registration certificate telling you when your first return will be due. But there is a lot to get set up before this.
Firstly, you need to know your business – and the VAT rates that could be associated with the various products or services you will be providing. HMRC produce a lot of industry specific notices to help you get it right. DNS and its accountants are always there for direction, support or clarification.
When raising invoices, you need to add the right VAT – the right set up of software can really help here.
On a regular basis you will need to submit returns to HMRC, electronically from your bookkeeping software. To do this you will need to be registered with HMRC for MTD and have connected your software. DNS accountants can do all this for you.
Getting your bookkeeping right, from the start, is key.
- Remember to collect VAT receipts now you are registered
- Scan and store for easy reference
- UK VAT number is required to claim the VAT paid
- VAT can only be claimed if charged e.g. there is no VAT on rail fares or magazines
- Small till receipts do not need to show the VAT separately but it may still be claimed e.g. coffee shop
- Use your software to help you be consistent in treatment
- Check VAT status for new suppliers or products
Your first VAT return can include some pre-registration VAT that you may have paid; so, it is worth taking the time to find the receipts to back up such a claim.
Pre-registration VAT may be claimed on
Stock and business equipment, you have on registration date and you bought less than 4 years previously e.g.
- Van bought new 3 years ago (but not a car)
- New tyre you purchased for it last year (but not labour)
- Stock of brochures Ÿ Half box of screws in stock
- Ink cartridge you bought yesterday
- Desk and shelves bought last year (but not installation or decoration costs)
- Costs of goods in stock awaiting sale
- Costs of part completed goods and materials
Services bought and used by the business (not customers) within the previous 6 months e.g
- 6 months telephone bills
- Own website design paid for 4 months ago (not clients)
- Accountancy bills in last 6 months (based on invoice date)
- Adverts billed in last 6 months (not publication date)
- Own business Van service last month (labour element only – parts may come under equipment rule)
- Training bills in last 6 months
- The VAT flat-rate scheme may help you save VAT.
- Remember to claim VAT on entertainment for overseas customers.
- Remember to claim VAT on expenses in relation to staff functions and office pares.
If you are working as sole trader and facing any issues with VAT return & registration, then please call us on 020 3500 2646 or Whatsapp us on 07739 339635