Ah, the age old question!
As business accountants, this question pops up every day, mainly because VAT can be a difficult tax to understand.
It’s yet another finance subject not really taught in schools – even though we all pay VAT every day! The average person knows next to nothing about VAT – but we aim to change that right now….
Here are quick answers to the most common questions about VAT our client ask us. For a more detailed explanation on what VAT is and examples on how it might affect your business, check our previous blog on the subject.
When do I have to register for VAT?
The short answer to that (at the time of writing) is:
- You will need to register for VAT when your business’ taxable turnover (your sales) exceeds £85,000 in a ‘rolling’ 12-month period.
HM Revenue & Customs give you 30 days from the end of the month you go over the threshold to register for VAT.
A ‘rolling’ 12-month VAT period means that you complete a whole year of business. After your first year in business, at the end of each month you will take your latest month and add it to the total figure. You will then remove the oldest month.
Here’s an example.
- You’ve just passed your first year.
- You’ve completed January 2021 – December 2021.
- When you get to the end of January 2022, you will take off January 2021’s figure from your total and add January 2022 to it.
So the total time period in which you calculate the VAT never exceeds 12 months.
Key points about timing your VAT registration
A couple of key points to note:
- Some businesses actually can’t register for VAT. For example, they may be making ‘exempt’ (not VATable) supplies, such as insurance and finance.
- Not all of your business income may count towards the £85,000 threshold. For some business types, you may have some overseas income (for example) that might not need to be counted. This is a very specific area so definitely do your research.
Can I register for VAT voluntarily before the £85,000 threshold?
Yes, for most businesses can you. Often owners consider doing this because they want to recover the VAT they are paying on their costs.
The issue is this.
- Yes, you may well be able to recover your VAT on yours costs
BUT
- You will also (in most circumstances) have to charge VAT on your sales
AND
- Find time and resources to complete extra paperwork and regular reporting
This can cause an issue with profits or pricing (see this blog for examples ).
What do most businesses do then? Are there any general VAT ‘rules’?
Well, that’s a broad question. Each business maybe in a different situation, but there are some trends we see:
- Generally, when your customers or clients are the public, business tend to wait until they have to register for VAT before doing so. This is to avoid the pricing and profit challenges VAT can bring.
- Generally, presuming the extra reporting/paperwork isn’t an issue, businesses working with other business will often to look to register for VAT early. This is because their customers or clients can likely recover the VAT they will need. With VAT not an issue, the business can more easily apply it to their sales.
Massive disclaimer! This is a very broad-brush comment! We recommend seeking professional advice to ensure you get the best answer for your own business situation.
Here’s another example.
- A business working with other very small businesses who aren’t VAT registered themselves, may want to wait until they have to charge it. It’s all down to the details and the maths(!) of each situation.
What’s the paperwork/reporting thing you keep mentioning?
When you register for VAT, you have to submit regular VAT returns to HM Revenue & Customs. This will usually be quarterly but could be as often as monthly.
You have to do this digitally, using software, under what the system that’s known as Making Tax Digital for VAT .
So your business can have software and admin time costs associated with submitting regular VAT returns. As VAT can be one of the more complex areas of tax, often business owners seek help from an accountant to check and submit these returns.
Help me with my VAT, please!
Ask your accountant or book a consultation with us to help you. We offer a paid 1 hour, 1-2-1 consultation so you can ask simple questions of an accountant. You don’t have to become a client, so it’s a great way for you to get the help, when you need it.
If you’re already VAT registered but struggling with the online paperwork or reporting side of things, we can also help with advice on keeping records digitally.