Should my business register for VAT? In this VAT registration guide, we will take a look at the process that is involved.
If you are running your own business, it is hopefully going well and your business is improving as time goes on. In this guide, we will look at as a contractor or small business owner, be it with a company or self-employment, are you required or do you want to voluntarily register for VAT.
VAT stands for Value Added Tax. This is the UK’s tax that is applied to the sale of goods or services:
- That are of a VATable nature; and
- Are provided by a VAT registered business.
You can consider registration for VAT when you set up your company for the first time. Alternatively, you can consider this when you have been in business for a while. This could be when you are self-employed or you are running your own company.
Our VAT guide covers VAT in more detail. This will give you an overall insight into how VAT works.
Under HMRC’s rules, a business is required to register, if its annual VAT taxable turnover exceeds the registration threshold of £85,000. The business also needs to register if knows that it will exceed the threhold in the future.
A business’ VAT taxable sales are the total of all goods that it sells and the services that it provides, that are not VAT exempt.
Compulsory and voluntary registration
There are two scenarios where you may register and these are 1) compulsory registration and 2) voluntary registration.
1 Compulsory registration
A business will need to register for VAT, if:
- It expects its VAT taxable sales to be more than £85,000 in the next 30-day period.
- The business had a taxable sales of more than £85,000 during the last 12 months -this means the value of what would be VAT applicable sales reached £85,000 in the last twelve months.
Other registration instances
A business might also need to register in some other cases. It will depend on the kinds of goods or services it sells and where it sells them. Certain sale of goods or services are not subject to VAT. There are also more complicated rules when you are selling goods or services or abroad. This includes between the mainland UK and Northern Ireland since Brexit. You can find more information about this on this on the HMRC website.
If the business exceeds the VAT threshold in the next 30-day period
When we consider should I be VAT registered, a business must register if it discovers that its total VAT taxable sales are going to be more than £85,000 in the next 30-day period.
The business will then need to register by the end of those 30 days. Its effective date of registration is the date that it discovers this, not the date its sales went over the threshold.
If the business exceeded the VAT threshold in the past 12 months
A business must register if, by the end of any month, its total VAT taxable sales for the last 12 months was over £85,000.
The business needs to register within 30 days of the end of the month, after which it exceeds the threshold. Its effective date of registration is the first day of the second month after it goes over the threshold.
When initially failing to register and once a business realises this, it will need to register as soon as possible. As part of registering, the business will need to backdate the registration to the date that it should have been registered for VAT. It must also pay what it owes in terms of VAT from the date that it should have been registered for VAT.
When a business is late in registering for VAT, it may also receive a penalty. The level of penalty will depend on how much it owes and how late its registration is.
2 Voluntary registration
A business can also register voluntarily, if its business sales are below £85,000.
Many contractors and some small businesses will decide to register, even if they are beneath the VAT threshold. There are both pros and cons when registering if you do not need to do. The main advantage is because the business can reclaim the VAT on their business expenses.
Another consideration as part of this, is your primary customer base, if they are VAT registered themselves. If they are, they will be able to reclaim the VAT that your business charges them. If they are not i.e., your customer base is primarily the public, as opposed to other businesses, registering for VAT will increase your prices by 20%. This will be a disadvantage, unless you decide to absorb this extra cost yourself which will then of course cut into your own profits.
There is another important point to consider for contractors when you are registered for VAT. It will give your business more credibility in the eyes of certain recruitment sectors.
The process to follow when registering for VAT
Once you have decided that your new business needs to, or would like to apply for VAT registration, you have two choices:
- You can apply for VAT online (most businesses choose this method) and the HMRC website allows you to register with your email address. After verifying your email, you will then be able to choose a password for your account. Shortly after doing this, you can choose organisation if you are a company, or individual if you are self-employed. As part of this, you will be setting up a new HMRC Business Tax account. A few clicks later, you can choose the VAT option via their online digital service and follow the onscreen instructions to register.
In many cases, a contractor or small business will let their accountant handle the VAT registration. However, if you do this yourself, this is the process to follow. Once the registration application is submitted, it usually takes two working days until you receive a message from HMRC. This will usually contain your new VAT registration number. Two working days after this, your HMRC account will be fully set up. At this point, you will have access to your VAT certificate.
- You can complete form VAT1 Application for Registration. Once completed you can send this through the post to HM Revenue & Customs (HMRC). If you apply through the post on form VAT1, it will you usually take a couple of weeks or more before HMRC respond. If they accept your registration application, they will send your VAT registration They will also send your VAT certificate through the post to your business.
Additional considerations during the registration process
As part of the registration application, there are various questions to answer and these include the following:
In the UK there is a standard industrial classification code list and you can use this to trace your business activity. If you are unsure here you can ask your accountant for help. Some of the standard UK codes in use are:
- 62020 Information technology consultancy activities -this is used for most IT consultants.
- 70229 Management consultancy activities other than financial management.
- 71129 – Other engineering activities.
- 69102 – Solicitors (legal consultants).
- 70221 -Financial management consultancy services (except Corporate Tax).
- 74909 -Other professional, scientific and technical activities.
- 66190 -Independent financial advisor SIC code (not specialising in insurance or pensions advice).
- Further still, you can find the codes for other Engineering activities at 71121 to 71129.
VAT accounting schemes
The main choices here are:
- VAT Flat Rate scheme -this was popular with contractors in the past. However, it is not so much nowadays, due to the limited cost trader rule. Therefore, most contractors choose not to register for this VAT sub-scheme.
- Cash accounting scheme or invoice accounting scheme. The latter is for larger businesses. This means that they declare and reclaim VAT to/from HMRC based on their invoice dates. If you are a small business, it is better to choose cash accounting. When using this option, you will then declare and reclaim VAT to/from HMRC based on when your business receives and pays invoices.
- Annual accounting scheme. VAT returns are usually filed with HMRC every three months. However, once registered you can choose to file VAT returns monthly. When you are registering for VAT, HMRC ask if the company would like to join the annual accounting scheme. This means that you would pay over any VAT annually. As this would involve saving aside the VAT for 12 months most contractors opt not to go for this. Therefore, they will complete and file their VAT returns on a three-monthly basis going forward.
VAT registration number
Once your business is VAT registered, it will receive its VAT number. This is the number that your business should show on future sales invoices to customers or clients. This should also be stated on any official correspondence such as letters, and the company website.
Operating VAT and keeping VAT records
Invoicing your clients, once you are registered for VAT
It is important to note, that once you are registered for VAT, you will need to know how to add VAT when you create your invoices for your work.
If you are also recharging expenses to your client, you will also need to be aware of the correct process when doing this.
Therefore, once registered, the business must charge VAT on its fees or sales to its customers. When you come to charge VAT on your invoices, this applies from the date of your registration for VAT. The current standard rate of VAT is 20%.
Example of charging VAT
5 days @ £400
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VAT @ 20%
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Reclaim VAT on your expenses
Once registered and if operating under the normal VAT scheme (as opposed to flat rate VAT), your business will be able to reclaim the input VAT on the expenses from VATable suppliers.
File VAT returns
As part of filing future VAT returns, the business will need to keep VAT records. Nowadays, it is compulsory for VAT registered business to comply with Making tax Digital (MTD). Many contractors and small business owners will let their accountants handle this process. In addition, the actual VAT returns also now need filing through MTD compliant software.
Once your company is registered for VAT and you are set up for MTD, the VAT returns will need filing in the future. The VAT payable to or receivable from HMRC is based on:
VAT on sales income.
VAT on expenses income.
Once you have completed the boxes on the VAT return, box 5 will show the amount to be paid or to or what is due back from HMRC.
If there is an amount due, your company can then pay the VAT to HMRC. If a refund is due, HMRC will refund this to the business.
VAT returns cover three-month periods. A business has one month and seven days with which to file the VAT return with HMRC. Therefore, for a VAT quarter ended 30 June the filing due date and payment deadline would be 7 August.
This guide should give you a good overview when you consider should I register for VAT. There are benefits to registering, even if you are not required to do so. Of course, this will depend on your own personal situation. Finally, it is your choice whether you would like to voluntarily register, when you first start up your own business.
Link to Contractor Advice UK group on