What You Need to Know About VAT Registration
One of the most common taxes in the UK is Value Added Tax (VAT). VAT is added to the majority of goods and services sold by all types of businesses throughout Britain. Knowing how VAT works and if you need to, or want to, register for VAT is an essential part of running a business. So, if you have to sign up for VAT, would you know the right way to go about it? In this article, we have detailed everything you need to know about the VAT registration process.
What is VAT?
VAT stands for Value Added Tax. VAT was first introduced in the UK back in 1973. Certain rates of VAT are applied to a range of goods and services at the point of sale. It is added to the purchase price of an item by the retailer and paid by the consumer to a business.
The business must then report the VAT they have charged their customers and paid to other businesses to Her Majesty's Revenue and Customs (HMRC). The amount of VAT a business must pay to HMRC is the difference between the amount of VAT it has charged its customers (known as output VAT) and the amount of VAT it has paid to other businesses (known as input VAT). In other words, once a business has deducted the input VAT from the output VAT, what is left is either the amount it must pay HMRC or the amount of VAT it can claim back.
There are three applicable VAT rates:
- A standard rate of 20 % VAT, which applies to most goods and services
- A reduced rate of 5 % VAT, which applies to some goods and services
- A zero rate that applies to certain goods and services
Some goods and services are VAT exempt, which is a different category than zero rated goods and services. A full list of what VAT rates apply to what goods and services can be found on the UK government’s website www.gov.uk.
Does your business need to register for VAT?
Not every business in the UK has to register for VAT, some businesses are required to, some business owners choose to register voluntarily, and some businesses are ineligible to register for VAT.
You must register for VAT if your total taxable VAT turnover in the last 12 months was more than £85,000. You must also register for VAT if you expect your turnover to exceed £85,000 within the coming 30 days. If either you or your business is based outside the UK or you supply any goods or services to UK customers, you must register for VAT.
If your VAT taxable turnover per annum is less than £85,000, you do not need to register for VAT. However, some business owners find that it can be beneficial to register even if they are below the VAT threshold.
If your business exclusively sells goods and services that are VAT-exempt, you are ineligible to register for VAT.
What are the benefits of registering for VAT?
Some business owners decide to register for VAT before they start trading to alleviate the burden of administrative duties later on. There are significant costs involved with re-pricing goods and services and changing your accounting system to accommodate VAT.
Other business owners decide to register for VAT immediately because they know their business will incur high start up costs. The VAT paid on these costs can then be claimed back from HMRC.
A VAT-registered business can reclaim the VAT it pays on its business expenses. If your enterprise has a high amount of ongoing business expenses, then it makes good sense to register for VAT, even if your taxable VAT income falls below the VAT threshold of £85,000 per year. The VAT paid on outgoing business expenses can be reclaimed from HMRC via your VAT returns.
There are significant penalties that will be applied if you fail to register for VAT. If your business is above the VAT threshold of £85,000 per year, then you have a legal obligation to register for VAT.
How do you register a business for VAT?
The simplest and fastest way of registering a business or company for VAT is to visit the UK government website www.gov.uk. You will need to create an online VAT account for your business. This is known as a Government Gateway account. Once you have registered, this your Government Gateway account is used to submit VAT Returns to HMRC.
If you like, you can also download a VAT1 form from www.gov.uk and submit your VAT registration by post.
You are not eligible to register for VAT online and must register by post if:
- You are applying for a registration exemption
- You want to join the Agricultural Flat Rate Scheme
- You are registering separate business segments or divisions of a body corporate that each requires individual VAT numbers
To complete either an online or postal VAT registration, you will need to provide the following details:
- A National Insurance (NI) number or a tax identifier (Unique Taxpayer Reference – UTR)
- Information on any other businesses you have owned during the past two years
- The details of your business bank account
- If you have recently acquired the business, you will need to provide records of the sale
If you wish to register for VAT and have not yet begun trading, or you are registering on a voluntary basis, then HMRC requires that you show proof of intent to trade. Usually, HMRC will request to see invoices that have been paid by your business to prove that it is a genuine concern and that you are applying for VAT for legitimate reasons.
How to choose a VAT scheme
During the VAT registration process, HMRC will require that you choose a VAT accounting scheme under which you wish to operate under. The VAT accounting scheme you choose will determine how much VAT you may be able to reclaim, when you must complete VAT returns, and when you must make VAT payments.
There is a range of accounting schemes that you can choose from for your business. These include:
- Standard VAT accounting
- Annual VAT accounting
- VAT flat-rate schemes
- VAT cash accounting schemes
- VAT margin schemes
- VAT retail schemes
Choosing the right VAT accounting scheme can have a huge impact on your business. We suggest that you thoroughly research all your options before making a decision. You may find it helpful to seek advice from an accountant or a professional business consultant to ensure that you choose the VAT accounting scheme that will work best for your business.
What do you need to do once you’ve registered for VAT?
Once you have registered for VAT, HMRC will send you a 9-digit VAT number. This number must be included on all invoices that your business creates. HMRC will also advise you on when you must submit your initial VAT return and payment.
You will also receive confirmation of your registration date, which is known as the effective date of registration. Your VAT accounting period will begin as of the official effective date of registration, so it is crucial to make note of this.
From this point on your business will be required to add the relevant VAT amount to the prices of all goods and services it is applicable to. You must ensure that you issue VAT invoices to your customers. You will be required to submit VAT returns and pay any VAT that is due to HMRC promptly. Additionally, a business is required to keep accurate and up to date digital VAT records and maintain a VAT account.
If your business earns or is expected to earn over the VAT threshold of £85,000 per year, you will need to register for VAT. Even if you do not expect to earn this amount, you may wish to register for VAT to claim back the VAT you have paid on business expenses.
While the VAT registration process is relatively straightforward, keeping track of all your VAT accounting can be complex. Many businesses and companies in the UK choose to use Mooncard to help them stay on top of their VAT accounting. Mooncard makes the process of recording all VAT transactions simple and fast. Book a no-obligation, free Mooncard demonstration online today!