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Becoming VAT Registered

6 May 2024

Anyone in business, whether sole trader, partner or limited company, must register for VAT when their taxable turnover reaches £90,000 over a rolling 12 month period.  It can be advantageous for some businesses to register before they reach the threshold as they will be able to claim back VAT on purchases.

What is a rolling period?

A rolling month period will take the total taxable turnover between a 12 month period i.e. from April to March or August to July or January to December.  It does not relate to your financial year.

What is taxable turnover?

Taxable turnover is everything you sell, goods or services, which is potentially subject to VAT at either 20%, 5% or zero rate of VAT.  It does not include goods or services which you sell outside the UK as those are classed as Out of Scope.  It also does not include goods or services which are exempt from VAT.  There are very few items which are exempt from VAT but would include sale of insurance, rental income (if the property is not opted to tax), education or healthcare.  A more detailed list of exempted sales can be found at HMRC.  

What income should be included when calculating turnover?

  • All sales within the UK and Northern Ireland which are not exempt from VAT.
  • The value of a sale made via an online platform before any fees are deducted (the VAT on fees will be recoverable once VAT registered)
  • Commission received
  • The vale of any purchases where you are liable to report the VAT element.  This is known as Reverse Charge.  Google advertising and Microsoft are digital purchases where Reverse Charge VAT is applied and must be declared as income (as well as being deducted from purchases once you are VAT registered).

What income should not be included in the turnover calculation for VAT registration?

  • Sales made outside the UK
  • Grants
  • Interest earned

Is there an advantage to becoming VAT registered?

The advantage will depend on what type of business you are. 

  • Service businesses which work with consumers rather than other businesses may find it difficult to compete with other businesses who are not VAT registered as prices will be likely to be 20% higher once VAT registered.
  • For small businesses selling to other businesses it may be advantageous to be VAT registered as it can make the business appear larger than it actually is.
  • The main advantage to becoming VAT registered is that you can claim back VAT on your purchases (as long as you have a valid VAT invoice or receipt) and this reduces the amount of VAT you have to pay HMRC which you have collected on your sales.
  • If your sales are all or mainly 0% rate of VAT - generally food items - it can be advantageous to register as you won't have to charge VAT to your customers but can claim back VAT on any items you purchase for your business which have VAT on.
  • As soon as you the become VAT registered you can claim back VAT on any purchases of goods you have made over the last 4 years which you still have in your business.  This is most likely to be assets you purchased when starting out or stock that you still hold.

Registering for VAT

  • Once you reach the threshold for VAT registration you have 30 days in which to register with HMRC.  If you want to voluntarily register you can register at any time but it is worth bearing in mind the 4 year rule for claiming back VAT on earlier purchases so you don't miss out on claiming this.  
  • Before registering you must decide whether you want to use the Flat Rate Scheme for reporting your VAT as you can claim a further 1% discount when choosing this scheme at registration.  However it is not appropriate for some businesses and you will need to have decided whether it is right for your business in advance of registration.  Further information about the Flat Rate Scheme can be found here.  
  • As soon as you have applied for registration you must start charging your customers VAT which means adding 20% to your goods or services where applicable and you must provide your customer with a VAT invoice or VAT receipt which must contain very specific information.

VAT Records

  • You must keep a record of all your sales and all your purchases with documents to support them.
  • You will need to prepare and submit a VAT return each quarter on or before the deadline to avoid penalties and interest charges.
  • The VAT return will show all your sales and all your purchases and the VAT charged and claimed back.  Not all purchases will have VAT to reclaim as some suppliers may not be VAT registered and some purchases may be zero rated or exempt from VAT or be Outside the Scope.  Some purchases may be Reverse Charge where they are reported as both income and a purchase.
  • VAT returns can easily be produced from accounts software and if you keep this up to date on a daily or weekly basis it will not be difficult to produce and submit the VAT return in advance of the deadline.

Summary

Becoming VAT registered is seen by some to be a bad thing, but if you have a growing business it is inevitable that you will reach this milestone and will need to adjust your prices accordingly. 

If you do not want to become VAT registered your sales need to remain under the £90,000 threshold over the rolling 12 month period.  If you make a lot of purchases which you charge on to your customers it will be more difficult to keep the sales low and have enough profit to give you the income you require.

Remaining outside of the VAT registration threshold may mean reducing the amount of work you do, or the number of days you work each week.

View the non-amp article