VAT Registration: Key Rules and Considerations
VAT registration is a key consideration for small businesses in the UK. Understanding the thresholds, tests, and implications of VAT registration can help businesses stay compliant while making informed financial decisions.
Here’s a concise guide to when VAT registration is compulsory, when it might be voluntary, and what to expect.
Contents
Compulsory Registration
Not all businesses need to be registered for VAT. However, if a trader makes ‘taxable supplies’ (see below), we need to consider two separate tests to determine when they must register for VAT:
| Historic Test | Future Test |
|---|---|
| Review Date: This test is applied at the end of every calendar month. | Review Date: This test is applied at any time. |
| Test: If taxable supplies over the previous 12 months exceed the ‘VAT registration threshold’, registration is required. | Test: If taxable supplies for the next 30 days are projected to exceed the ‘VAT registration threshold’, registration is required. |
| Notification: HMRC must be notified within the following 30 days. | Notification: HMRC must be notified before the end of the above 30-day period. |
| Compulsory Date: VAT must be charged on taxable supplies from the start of the following month. | Compulsory Date: VAT must be charged on taxable supplies immediately. |
‘Taxable supplies’ for VAT registration purposes relate to the VAT-exclusive sales value of goods or services subject to VAT at either the standard, reduced or zero rate. Exempt and certain other supplies are excluded from the registration tests.
As of the latest threshold changes on 1st April 2024, the ‘VAT registration threshold’ is currently £90,000.
Voluntary Registration
Even if a business’ taxable supplies do not exceed the registration threshold, it may be possible to voluntarily register for VAT. Each business should consider the advantages and disadvantages of voluntary VAT registration, weighing the potential benefits against the additional responsibilities it entails.
| Advantages | Disadvantages |
|---|---|
| VAT Recovery: Ability to reclaim input VAT on purchases. | Increased Prices: Output VAT must be added to sales, potentially deterring non-VAT-registered customers. |
| Enhanced Credibility: May appear more professional to clients and partners. | Compliance Burden: Businesses must submit regular VAT returns and adhere to record-keeping requirements. |
| Avoid Penalties: Reduces the risk of late registration penalties. | Impact on Cash Flow: Businesses must remit VAT collected to HMRC, which could affect cash reserves. |
Voluntary registration is also available for intending traders - businesses planning to make taxable supplies in the near future. This allows VAT recovery on costs incurred during the setup phase.
Pre-Registration Input Tax
VAT-registered businesses can reclaim VAT on certain purchases made before registration:
- Goods: Acquired up to four years prior and still held at registration.
- Services: Supplied within six months prior to registration.
Input VAT on these items can be recovered on a trader’s first VAT return, once they have registered for VAT.
Exemptions and Exceptions
It’s important to distinguish between an exception to VAT registration and an exemption, as these terms sound similar but have different implications for businesses.
Exception: A business temporarily exceeds the VAT registration threshold (£90,000) but expects taxable turnover in the next 12 months to fall below the deregistration threshold (£88,000).
In such cases, the business can request an exception from registering, which must be agreed upon with HMRC. This request requires clear evidence that future taxable sales will not exceed the compulsory registration threshold.
Exemption: If the business registered for VAT, this would lead to regular VAT repayment claims; i.e. VAT on purchases consistently exceeding VAT on sales, as all or most of the taxable supplies are zero-rated.
An exemption saves a business the trouble and expense of having to keep proper VAT records and filing VAT returns. However, traders who make zero-rated supplies may voluntarily register for VAT to reclaim VAT suffered on purchases.
Both exceptions and exemptions require formal approval from HMRC and are not automatic rights. Businesses must carefully assess their situation and provide supporting evidence when applying for either.
Deregistration
Businesses registered for VAT may be required to deregister or may voluntarily deregister in certain circumstances:
| Compulsory Deregistration | Voluntary Deregistration |
|---|---|
| Conditions: The business ceases to make taxable supplies (e.g. on cessation, business sale, or change of trade). | Conditions: Taxable supplies are expected to fall below the ‘VAT deregistration threshold’ in the next 12 months. |
| Notification: HMRC must be notified within 30 days of the relevant event. | Notification: The business can notify HMRC to request voluntary deregistration. |
| Effective Date: Deregistration takes effect from the event date. | Effective Date: Deregistration takes effect from the notification date (or a later agreed date). |
As of the latest threshold changes on 1st April 2024, the ‘VAT deregistration threshold’ is currently £88,000. The business must not charge VAT after the effective date of deregistration.
When deregistering, the final VAT return must also include a ‘deemed supply’ VAT charge for assets held by the business on the last day of registration, unless any of the following conditions are met:
- The business is transferred as a going concern to another VAT-taxable person;
- The taxable person has died, become bankrupt or incapacitated and the business is carried on by another party; or
- The VAT charge on the deemed supply would not be more than £1,000.
Various goods and assets are excluded from the final VAT return charge, such as non-business goods, items bought from unregistered businesses and most motor cars.
What Should You Do?
Navigating VAT rules can be challenging. If you’re unsure when to register or deregister, or whether voluntary registration is the right choice for your business, seek professional advice. At Veritas ATS, we’re here to guide you through the process and ensure your obligations are met efficiently.
Get in Touch
For more information on VAT registration and compliance, contact us today to arrange a free initial consultation.
This article provides general information and should not be considered professional advice. It reflects legislation and practices at the time of writing, which may change. Individual circumstances vary, so please consult us before taking any action. We accept no responsibility for financial loss arising from actions taken without our written advice.
Liam O'Riordan
As Principal at Veritas ATS, I help start-ups, owner-managed businesses, and individuals simplify accounting and tax, providing clear, practical solutions tailored to their needs.
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