What to think about when you’re considering registering for VAT
With a standard rate of 20%, understanding the impact of Value Added Tax (VAT) on your business can be critical, even leading to increased profitability in some instances. While failing to do so can result in significant, but largely avoidable, penalties.
VAT was introduced to the UK in 1973 as a condition of membership of the European Union. It is a tax on the consumption of goods and/or services supplied by businesses registered for VAT. Any person carrying on a business above certain thresholds may be required to register for VAT.
VAT is self-assessed so that the responsibility to recognise any requirement to register for VAT, or to determine the correct liability lies entirely with the business owner. However, while the requirements of the VAT system can be significant it can actually be advantageous for some businesses to be registered providing enhanced cashflow or even a real financial advantage.
Who is required to register for VAT?
If the total value of everything you sell or supply, that is not exempt from VAT, in any 12 month period exceeds the VAT registration threshold you will be required to register for VAT. Similarily, if you receive goods of/above this value from other EU member states, or expect to generate income exceeding the current threshold in the next 30 days. There are also now special rules for digital services as set out below.
Special rules for digital services
On 1 January 2015, new rules were introduced for paying VAT in the EU when supplying ‘digital services’ to customers in other member states. They required all businesses supplying these services, irrespective of turnover, to register under the Mini One Stop Shop Scheme including those distributing apps, games, e-books, knitting patterns, music downloads, programmes or films through websites, and some digital stores or streaming services.
On 1 December 2016, it was announced a set of thresholds would be introduced but these may not now take effect before 2018.
Would it benefit me to be registered for VAT?
While many businesses struggle to pass on the full VAT cost to their customers, others do not, and registering for VAT can be advantageous to them. It is possible, therefore, to register for VAT voluntarily even if your turnover is below the relevant threshold.
If you produce zero rated goods, or sell (mainly) outside the EU, you could gain financially from the ability to recover VAT on costs. If your customers are already registered for VAT and can recover any VAT you charge you might benefit from increased cashflow and/or profitability by registering.. Any perceived advantage, however, must be carefully balanced against the increased compliance costs, and the need to minimise any exposure to penalties.
Registering for VAT
Once you have decided you want/need to register for VAT there are a number of additional issues to consider:
- What date to register from
- What VAT return stagger would suit you/your business best?
- Are there any accounting schemes you could benefit from?
- Will the records you are keeping meet the requirements of HMRC?
Addressing all of these issues at the time of registering can avoid unnecessary complications later for you, your accountant and your customers.
As mentioned previously, VAT was introduced in the UK as a condition of membership of the EU. Post-referendum there is a great deal of uncertainty around what impact Brexit will have on the current VAT regime. It is almost inconceivable however, given the efficiency of the scheme, it will not remain largely intact whatever our future relationship with Europe.
The HMRC website contains a wealth of general information in relation to VAT, as well as much more detailed information on certain aspects affecting particular types of businesses.