Registering for VAT

Choosing to register or compulsory registration

Voluntary registration

We may be able to help you save significant amounts of VAT by making the right decision on voluntary registration or understanding the rules for compulsory registration.

A new business sometimes incurs a large amount of VAT on its set up costs. It is sometimes thought that the business must register for VAT to recover those costs, but that is not necessarily so.

Recovery of input tax

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 must be 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.

In the case of 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.

In the case of 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 some benefit from delaying registration.

The advantages 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 2010 the registration threshold is £70,000.

Suppose the sales for the twelve months to the end of month 'A' were £70,001. 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.

Taking over an existing business

If you take over an existing business, you may be required to register from the date of take over.

Compulsory registration because of future sales

Normally, this rule 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 £70,000.

For example, a new 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 expects to make sales of more than £70,000 in the next 30 days.

Note that in this example, the sale of a newly constructed house is zero-rated.

Method of registration

All new VAT registrations must be made online. We have been doing that for our clients for several years. All new registrations and all existing registrations with a turnover exceeding £100,000 must file their VAT returns and pay the tax electronically. We are registered to submit VAT returns on behalf of clients.

Choosing the flat-rate scheme

The flat-rate scheme is a simplified VAT method for a business with a turnover of under £150,000. This scheme can benefit many businesses but has some disadvantages. In particular, it may not be advisable to adopt the flat-rate scheme in the first quarter because of a restriction on the recovery of input tax on the start-up costs.