Businesses that supply, or intend to supply, some form of goods or services in the UK in the course of a business are usually able to register for VAT.
Registration becomes compulsory (as opposed to optional) if either of the following happens:
- taxable supplies in the last 12 months (or from the start of the business, if it started within the last 12 months) exceeded £85,000; or
- there are grounds to believe that taxable supplies in the next 30 days alone will exceed £85,000
In the former case, the business has only 30 days from the end of the 12 month period in which to register for VAT; in the latter, it must register by the end of the 30 day period.
A business that pays overseas suppliers for services must be careful to treat the payments as part of the taxable turnover when performing the above tests.
The number one misconception?
Problems often arise because of a common misconception that the "12 month test" is based on the turnover declared in the "annual accounts". It isn't, it's a rolling 12 month test, so an unregistered business trading anywhere near the threshold should perform the check every single month (or perhaps just register for VAT voluntary while still beneath the threshold, if it is felt that compulsory registration is going to be inevitable in the near future anyway).
If a business has breached the threshold, it should inform HMRC at the earliest opportunity, particularly if it is already late in doing so. Penalties apply where a business registers late and the penalties escalate depending on how late the notification is made, so it will be in the business's interest to disclose at the earliest opportunity.
HMRC may not apply a penalty where there are mitigating circumstances, for example bereavement or serious illness.
Will HMRC grant an exception?
If a business realises that it has breached the threshold but this is (or was) due to an unexpected increase in turnover that will not be repeated, it may apply to HMRC for an exception from registration. HMRC will accept a late application, but only if the business can show that at the time the threshold was exceeded there were reasonable grounds to believe it was a one-off event. If the business is very late registering and its turnover has repeatedly exceeded the registration threshold, an exception is probably not going to be granted.
Issue VAT only invoices
Following late registration, the business will initially have to hand over to HMRC one-sixth of the standard rated sales it made during the period it should have been registered. This is because those sales will be treated as VAT inclusive (even though VAT was not invoiced or charged at the time).
So for example, on a £100 sale, the business will have to account for £16.67 as VAT, leaving it £16.67 out of pocket.
However, it may be possible for the business to now issue "VAT only" invoices to certain customers (if they are VAT registered and able to reclaim the VAT, or if any contract between the business and a customer provides for this).
This avenue should be explored fully by the late-registering business faced with having to pay over large amounts of VAT, as it may significantly reduce, if not eliminate altogether, the ultimate financial impact of having to account for historic sales VAT.
Continuing the above example, if the customer is happy to accept a VAT only invoice, the business would now raise a VAT only invoice for £20.00. On the next VAT return it would pay across to HMRC £3.33 (the difference between the £16.67 already accounted for on the first VAT return; and the £20.00 VAT invoice now raised); and the business would recover the £20.00 from the customer. The business is no longer out of pocket.
Flat Rate Scheme?
Some late-registering businesses may also limit the financial impact by signing up to the Flat Rate Scheme, if the eligibility criteria are met.
Zero-rated, exempt or outside scope supplies
It's also important to recognise that some of the sales made during the period when a business should have been VAT registered, might have been zero-rated, or exempt, or even (e.g. in the case of supplies of services to overseas businesses) outside the scope of VAT altogether. There would be no VAT to account for on these transactions, notwithstanding the late registration.
Claim purchase VAT
A late-registering business should still be entitled to claim all the purchase VAT that it would have been entitled to claim, had it registered on time. This includes "pre-registration" VAT on services acquired in the six months prior to the start of the registration period, and on goods bought in the four years prior to the start of the registration period (but only to the extent those goods are still held on the first day of the registration period.)
If you have any questions about late VAT registration or require any assistance with VAT matters, contact us today.