VAT registration is usually mandatory where the value of taxable supplies made in the UK in the course of a business exceeds the VAT registration threshold in any twelve month period (unless the breach is due to exceptional circumstances); or where the value of taxable supplies is expected to exceed the registration threshold in the next thirty days alone. At the time of writing, the VAT registration threshold is £85,000.
A common misconception is that the twelve month test applies only to the turnover figure in the annual accounts of the business - not so. The twelve month test must be applied on a rolling twelve month basis, so unregistered traders who are in any danger of breaching the threshold need to perform the test every month - not just once a year.
Here are examples of how the basic tests apply in practice:
Twelve month test
Fred's accounts for the first twelve months of trading to 31 March 2019 showed taxable turnover for his clothing retail business of £80,000. At that point he was not yet VAT registered - and was not required to be because his taxable sales on a rolling twelve month basis had not exceeded the registration threshold of £85,000 at any time up to that point.
Continuing the pattern of growth in monthly sales, April 2019 turns out to be very busy with turnover of £12,000; his turnover for April 2018, by contrast, was only £5,000.
Therefore on a rolling twelve month basis, taxable turnover for the twelve months ending 30 April 2019 was £87,000, which exceeds the registration threshold of £85,000. Fred should apply for VAT registration by 30 May 2019 and he will become VAT registered effective from 1 June 2019.
Thirty day test
Sally's company is not VAT registered. On 1 April 2019 she realises that the company's taxable supplies in the next 30 days alone will exceed £85,000. Sally should apply for VAT registration no later than 30 April 2019 and the company will be registered from the date she realised the threshold would be exceeded, in this case 1 April 2019.
Failing to register for VAT on time is, unfortunately, a fairly common occurrence. Traders may not understand how the registration tests work; or may not realise that penalties can apply if HMRC is not notified within specified timescales. In the case of the rolling twelve month test, HMRC should be notified within thirty days of the end of the period in which the registration threshold is exceeded. In the case of the thirty day test, notification should take place within thirty days of when it is realised that the turnover will exceed the threshold in the next thirty days alone.
Where a business has gone over the regisration threshold but wishes to avoid having to register, an exception may be sought from HMRC if it can be shown that the breach was due to one-off, exceptional circumstances. A request for an exception should be made within 30 days of having breached the threshold, and applicants are expected to be able to show that taxable turnover in the following 12 months will not breach the deregistration threshold, currently £83,000.
Businesses who are typically in a repayment position (i.e. those with zero-rated sales) and do not wish to register for VAT can apply to HMRC for an exemption from registration.
Traders may register for VAT voluntarily where taxable supplies do not exceed the threshold, as long as some level of taxable supplies is made, or intended to be made. Voluntary registration is common not only where the trader's taxable supplies are approaching the registration threshold, but also in many other circumstances. Voluntary registration is often attractive to the startup business that expects to incur a lot of purchase VAT during the early days of operation.
Registering for VAT may also offer traders the prospect of recovering purchase VAT that has previously been incurred on goods and services acquired for the purpose of the trade, subject to the detailed rules on "pre-registration VAT".