Tax Talk: VAT registration: to be or not to be?
It’s easy to make assumptions about the pros and cons, and legal requirements, of VAT registration. But it’s not as straightforward as you might think. Here’s our guide.
To be or not to be VAT registered? That’s the question all organisations should consider when starting up, and also during the course of their life cycles. The mechanics of signing up for VAT registration are fairly quick and simple. But deciding when and whether a business can or must register can be complicated.
When is a business ‘in business’?
The first point to address is that organisations only fall within the scope of VAT if they undertake ‘business activity’. HMRC guidance suggests there is a two-stage process to assess ‘business activity’.
Stage 1: The organisation is involved with activities that lead to a supply of goods or services for consideration.
Stage 2: The organisation makes supplies for the purpose of obtaining income. Therefore, there needs to be a direct link between supplies rendered and payment received.
Mandatory VAT registration
Assuming there is business activity, a mandatory VAT registration only kicks in when a UK- established business meets the annual VAT registration threshold. This is currently £85,000.
Historic or future test?
To confirm if a business has gone over the threshold, there are two more hurdles to overcome via the ‘historic’ and ‘future’ tests.
At the end of each month, the business must look back over the previous 12 months to monitor whether, accumulatively, their taxable supplies have exceeded the threshold. If the threshold amount has been breached, the business will be required to notify HMRC – through an online VAT 1 registration form – in the 30 day period following the breach. VAT registration is initiated from the first day of the following month.
If a business expects its taxable supplies to breach the threshold in the next 30 days alone, it must register for VAT immediately. The business should notify HMRC within 30 days of the date it realised the threshold would be exceeded.
It is good practice to carry out these tests regularly, as any delay in notifying HMRC can incur penalties.
In principle, businesses can (at HMRC’s discretion) apply to be voluntary VAT registered before their taxable supplies exceed the VAT registration threshold. In fact they can apply to be VAT registered if they have an intention to make taxable supplies in the future but haven’t made any yet. There’s a clear advantage here. A business should be able to recover the VAT incurred on eligible expenses, without the obligation to declare VAT on their supplies. That’s because, to date, they haven’t made any.
Barring certain exceptions most b2b supplies of services overseas are not subject to UK VAT, as they are considered to be supplied where the business customer belongs. So where a supplier only makes ‘outside the scope’ services, they’re not usually required to register for VAT. But they could benefit from a voluntary registration if they incur considerable amounts of VAT on their expenses.
Other benefits of a voluntary registration include an image of professional credibility and the avoidance of continual threshold monitoring – as there can be significant penalties for late registration.
A voluntary VAT registration can be a commercial handicap for b2c businesses where income is likely to remain below the VAT registration threshold. This is because the VAT added to the price may make supplies more expensive in a competitive market where other vendors remain unregistered. Or it could mean profitability takes a hit because suppliers need to absorb the VAT inherent in the price to remain competitive. What’s more, compliance and maintaining records for up to six years is an administrative burden and costly.
More to think about
Avoiding VAT registration
Export sales of goods from the UK are generally subject to VAT at the zero rate. But businesses that only make zero-rated supplies of goods outside the UK may apply for permission to be exempt from VAT registration. This may be wise where minimal VAT is incurred on purchases connected with making the export supplies.
No VAT registration threshold
Non-UK established businesses making supplies in the UK that require them to VAT register (that’s a whole article in itself), are not eligible for the £85,000 safety net threshold and must charge UK VAT from day one.
Exempt supply pitfall
Businesses that only make exempt supplies (for example, in the financial sector) are not eligible to register for VAT. But where an otherwise UK VAT exempt business buys in services from overseas that exceed the threshold, they are required to register for VAT and must account for the VAT on the value of the services bought in. This is a pitfall that’s frequently overlooked, as such businesses simply don’t have VAT on their agenda.
I wish I had a pound for every time I’m asked, “How complicated can VAT be? It’s only 20%!”. This article shows that VAT registration alone can be a minefield. And that’s without even considering the issues that holding companies and b2c suppliers of electronic services face. It’s crucial for all businesses to put VAT at the top of their agenda. If you would like advice and support on any issues raised in this article, please contact Natalie Braier. PKF’s VAT team can help clients from all sectors both domestically and internationally.
For more information on the issues raised in this article, please contact Natalie Braier.