Three types of registration
There are three types of VAT registration:
- Compulsory, because of taking over a VAT registered business as a going concern.
- Voluntary.
- Compulsory, because sales have or will go over the registration limit.
Recovery of input tax
Assuming that the business is not adopting the flat-rate scheme from registration, on its first VAT return, a VAT registered business can reclaim VAT on purchases (input tax) paid before registration. Whether the input tax was on goods or services, the following conditions must be met:
- The purchase must be for the purpose of the VAT registered business. Therefore, the purchase cannot be for personal purposes or for a different business.
- The input VAT is deductible under the normal rules, so not on entertaining expenses or motor cars.
- The purchase must not have been supplied on to a customer before the date of VAT registration.
If the business is adopting the flat-rate scheme from registration, it may only claim the input tax on items of capital equipment with an individual cost of £2000 or more.
Additional rules for goods
The business must have purchased the goods within three years of registration.
The business must have a stock account reconciling the quantities purchased, quantities sold before registration, and quantities on which the input tax is claimed. In other words, the account must show that the business has only claimed input tax on goods still on hand at the date of registration.
Additional rules for services
The business must have purchased the services within six months of registration.
The services must not have been used on goods sold before registration. For example, the service cannot be the repair of a machine sold before registration.
The benefit of delaying voluntary registration
There is a benefit of delaying the registration of a business supplying consumer goods or services. For example, suppose a new business that only supplied services incurred VAT on renovating a shop and buying equipment. Suppose the business charged £25,000 to the general public in its first six months.
If it registered for VAT at the beginning, the business would have to pay VAT on the sales of £25,000 x 17.5/117.5 = £3,723. If it did not register for nearly six months, it would avoid accounting for VAT on those sales. Either way, the business would claim back the VAT on the renovation and equipment, so delaying registration would save £3,723.
If the business sold goods, the benefit would not be as great because the business would be unable to claim back the VAT paid on goods sold. Even so, there would be a benefit from delaying registration.
Advantage of early registration
If all the customers are VAT registered businesses who will accept a charge plus VAT, there is no advantage in delaying registration.
If the business supplies goods, there is an advantage in early registration so that the business can claim back the input tax on goods supplied.
If the business only supplies services, it will make no difference whether the business registers immediately or within six months.
Compulsory registration because of past sales
Each month, the business has to check whether it has gone over the VAT registration threshold. From 1 April 2008 the registration threshold is £67,000.
Suppose the sales for the twelve months to the end of month “A” were £67,001. The business must apply for registration by the 30th of month “B”. HMRC must register the business with effect from the first day of month “C”.
This gives a timing problem because the registration will take several weeks so that the business will have to account for VAT before it has a registration number.
Registration because of future sales
Normally, this only applies to businesses that sell very large items. The rule is that you ignore past sales and look only at whether the business expects that the sales in the next 30 days will be more than £67,000.
For example, the business is the construction of new houses. On 10th of month “M”, the business’s solicitor says that he expects to exchange contracts for the sale of the first house within two or three weeks. The business is liable to register with effect from 10th of month “M” because, on that date, the business first expected to make sales of more than £67,000 in the next 30 days.
Note that in this example, the sale of a newly constructed house is zero-rated.
Flat-rate scheme
This is a simplified method of accounting for businesses with a turnover of under £150,000. We have a separate explanatory note.