A Comprehensive Guide to VAT Registration

Jul 3, 2023

Written by Greg Hanton. Greg is co-founder of Joy Pilot, No Worries Accounting, No Worries Red Umbrella, and Capital City Accountancy. He has over two decades of experience in providing tax and accounting support to contractors, especially those working in the UK. Greg holds a BE (Hons) in Chemical & Process Engineering from the University of Canterbury and a BSc in Chemistry from the University of Otago. He is also a Chartered Accountant (ACCA), member of AAT, and a Chartered Engineer (IChemE). With a passion for innovation and client-focused solutions, Greg continues to lead the charge in transforming the accounting landscape. See more on LinkedIn.

Updated on: Feb 17, 2024

Navigating the world of VAT registration can be challenging if you are new to contracting, especially when the stakes are high. With the potential benefits of reclaiming VAT on expenses and the consequences of non-compliance, it’s important to understand the ins and outs of VAT registration. In this comprehensive guide to VAT registration, we’ll explore everything you need to know, from understanding the different types of VAT registration, to choosing the right VAT scheme, managing your VAT responsibilities, and more.

I have written this article today mainly from the perspective of our limited company contractors, however the information here is also just as relevant for sole traders. And while we take care of the VAT registration process for our clients, most contractors and freelancers who are new to working for themselves will find this article worth exploring.

Video Summary

Want to watch our YouTube video instead? It summarises the main points but refer back to this article for more in-depth information.

Short Summary of our Guide to VAT Registration

  • Understand the threshold for VAT registration and which businesses are exempt.
  • Compare different schemes to select one that best fits your operations & goals.
  • Manage your responsibilities, reclaim pre-registration expenses, and avoid penalties from HMRC.

Understanding VAT Registration

A woman filling out a VAT registration form

VAT registration is essential for businesses that provide goods and services and reach a certain level of taxable turnover. Once registered with HMRC, businesses receive a VAT registration number, allowing them to charge and collect VAT on their offerings, and consequently, pay VAT to the government.

VAT registration is necessary for businesses whose annual taxable turnover for the last 12 months exceeds the VAT registration threshold of £85,000, also known as the VAT threshold. You must also register for VAT if you expect your turnover to go over £85,000 in the next 30 days.

There are two types of VAT registration: compulsory and voluntary, and some businesses are exempt from VAT altogether.

The vast majority of our clients provide some sort of service to their clients, which is almost always counted toward the taxable turnover threshold. But there are other types of income that do not count toward this overall threshold.

What turnover counts when registering for VAT?

This is a really important point because there are some types of business sales (turnover) that do not count towards the calculation of your taxable turnover. Its rare in the case of our clients, but potentially you could have a business with turnover of £500,000 that is not required to register for VAT.

Taxable turnover (for VAT registration purposes) is your business income excluding any supplies that are exempt of outside of scope for VAT. Examples of exempt supplies include any income from financial services or selling insurance, and any rental income from properties.

Example of supplies that are outside of scope for VAT most commonly (for our clients) is where a contractor based in the UK provides services to a company based outside of the UK. For example, if you work only for US based clients, none of your income would count towards the taxable turnover threshold.

Compulsory vs. Voluntary VAT Registration

Businesses with an annual taxable turnover of over £85,000 are required to register for VAT, and they will become VAT registered businesses. However, businesses with a lower turnover can voluntarily register for VAT if they wish to do so. There are advantages to voluntary registration, such as reclaiming VAT on start-up expenses, as well as on-going running costs for your business, and there is no VAT registration cost when registering on the HMRC website. Once registered you will need to start adding 20% VAT onto your business invoices, which will make your goods/services more expensive. So if you intend to register voluntarily then keep this in mind, especially if you are selling to the public. If you are providing goods/services to other VAT registered businesses, then they can claim the VAT cost back making your VAT registration cost neutral to them.

On the other hand, compulsory registration is mandatory for businesses that meet the VAT threshold, and failure to register can result in penalties from HMRC. It’s essential for businesses to understand their VAT obligations and determine whether compulsory or voluntary registration is the most suitable option for their operations.

Penalties for Not Registering for VAT

If you do not register for VAT in time, you will face a late registration penalty from the HMRC, and you will be required to account for any missing VAT yourself.

The penalty you will pay depends on how late you were to register, and it varies from 5% to 15% of the VAT that was due.

You also need to account for any missing VAT yourself. What this means is that if you were 3 months late registering for VAT for example, it is then in your best interest to approach all of your clients from the past three months and see if you can also collect a further 20% in VAT off them. If they are a VAT registered business this should be straightforward (because its cost neutral for them), however if they are not then you may find it very difficult to get a further 20% off them.

Let’s do a quick example. Murray is a freelancer who bills his clients, on average, £10,000 per month. He provides taxable supplies and although this business is new, he knows he needs to keep an eye on this taxable turnover for VAT registration purposes. Murray forgets to register in time and is 3 months late. To make things worse, his client will not back pay him any VAT. His last three months of income must now be treated as VAT inclusive, so £30,000 is reported as £25,000 net income + VAT of £5,000. His late registration penalty is 5% of £5,000 = £250. So Murray must pay £5,250 across to the HMRC for his first VAT return. So, his late VAT registration has cost him £5,250. Ouch!

VAT-Exempt Businesses

While most businesses are required to register for VAT when they meet the threshold, some businesses are exempt. Businesses that exclusively sell goods and services exempt from VAT do not need to register for VAT, while those selling zero-rated supplies may not need to register if their taxable turnover remains below the £85,000 threshold.

These VAT-exempt businesses are not allowed to register for VAT, as they do not charge VAT on their goods or services.

The vast majority of our clients sell standard rate taxable supplies, so its extremely rare for us to have VAT exempt clients.

Steps to Register for VAT

A person typing on a laptop, registering for VAT online

Registering for VAT involves providing necessary information, selecting an appropriate VAT scheme, and submitting the registration online. The online registration process is preferred by most businesses and is accessible through the HMRC website or Government Gateway. After registration, businesses receive a VAT registration certificate, usually within 30 working days, or sometimes even within 10 working days.

Required Information

To register for VAT, businesses need to provide specific information, such as:

  • National Insurance (NI) or Unique Taxpayer Reference (UTR)
  • Details of any previous businesses owned
  • Business bank account details
  • Sales records if applicable

Providing accurate and up-to-date information is important to ensure a smooth registration process and avoid potential delays or complications. For most of our clients this process is straightforward.

Additionally, businesses may need to provide further details depending on their circumstances, such as:

  • The name, address, and contact information of any previous businesses owned
  • The account number and sort code of their business bank account
  • Sales records for businesses that have been trading for over a year to demonstrate their turnover.

Online Registration Process

The VAT online registration process is straightforward and begins with the following steps:

  1. Create a Government Gateway account, which requires a Government Gateway ID and password. This will be your VAT online account and will grant you access to all the VAT online services.
  2. Once the account is set up, businesses can submit the required registration information discussed in the previous section.
  3. Receive a VAT registration information by post including your new VAT number, confirmation of your registration date, and information about when to submit your first VAT return and payment.

During the registration process, make sure all information provided is accurate and complete to avoid potential delays or complications. Once registered, you will be able to access your VAT dashboard through your Government Gateway account, which allows you to manage your VAT obligations, such as submitting VAT returns and making VAT payments.

Choosing the Right VAT Scheme

A person comparing different VAT schemes

Selecting the most suitable VAT scheme for a business is important, as it affects how the business manages its VAT obligations and can have financial implications. There are several VAT schemes available, including:

  • Standard VAT accounting
  • Annual VAT accounting
  • Flat-rate scheme
  • Cash accounting

Each scheme has its own eligibility criteria, benefits, and potential drawbacks, and businesses should carefully assess their options to determine the best fit for their operations.

By comparing VAT schemes, businesses can make an informed decision that aligns with their financial goals and ensures compliance with VAT regulations. In the next section, we’ll discuss the process of comparing VAT schemes in more detail.

Comparing VAT Schemes

Comparing VAT schemes involves assessing eligibility, benefits, and potential drawbacks to determine the best fit for a business. Here are some key points to consider.

  1. The standard VAT accounting scheme is available to all businesses.
  2. The cash accounting VAT scheme and annual accounting VAT scheme are available to businesses with a turnover of less than £1.35 million.
  3. The flat-rate scheme is suitable for businesses with an estimated VAT taxable turnover of £150,000 or less, excluding VAT.

When selecting a VAT scheme, businesses should consider the administrative burden, potential cash flow benefits, and the ability to reclaim VAT on purchases.

The vast majority of clients use the cash accounting scheme (which means you only pay VAT across to the HMRC once you have received it), and there is a bit of mix between which clients take the standard rate scheme, and which ones opt for the flat rate scheme.

Managing Your VAT Responsibilities

A person using a computer to manage their VAT responsibilities

Once registered for VAT, you must manage your VAT responsibilities, including:

  • Charging VAT on your sales
  • Providing VAT invoices to customers
  • Submitting VAT returns
  • Paying VAT owed to HMRC
  • Keeping digital VAT records and a VAT account (our Simplifi accounting software does this for our clients)

Compliance with VAT regulations is essential to avoid penalties and maintain a good relationship with HMRC. VAT is one area of tax where you want to ensure meet all required filing and payment deadlines to avoid VAT penalties.

One of the key aspects of managing VAT responsibilities is adhering to the Making Tax Digital (MTD) for VAT initiative, which requires businesses to keep digital records and submit their VAT returns electronically, including the necessary VAT element. In the next section, we’ll explore MTD for VAT in more detail.

Making Tax Digital (MTD) for VAT

Making Tax Digital (MTD) for VAT is a UK initiative that aims to streamline and simplify the VAT return process by requiring businesses to keep digital records and submit VAT returns electronically. The initiative ensures compliance with VAT regulations and reduces the likelihood of errors, which can lead to penalties and additional costs for businesses.

Businesses should familiarize themselves with MTD for VAT and the digital record-keeping requirements, as failure to comply can result in penalties from HMRC. By keeping accurate digital records and submitting VAT returns electronically, businesses can maintain compliance with VAT regulations, minimize errors, and focus on growing their operations.

For our clients this is a super easy. Our Simplifi accounting software complies with all MTD requirements, making MTD compliance a breeze.

Reclaiming VAT on Pre-Registration Expenses

A person looking at their pre-registration expenses to reclaim VAT

Businesses can reclaim VAT on purchases made before registration, subject to certain conditions and time limits for goods and services. Reclaiming VAT on pre-registration expenses can provide a financial boost for businesses, especially during the early stages of operation.

To reclaim VAT on goods purchased up to four years before registration, businesses must ensure that the goods are still on hand or used to make other taxable supplies. For services purchased during the six months before registration, businesses can reclaim VAT, provided that certain conditions are met.

VAT Penalties and Late Payments

Late VAT payments or return submissions can result in penalties from HMRC, which may be appealed if a reasonable excuse is provided. Penalties for late VAT payments are calculated based on the amount of VAT due and the length of time it is overdue, with additional penalties applied if the payment is more than 30 days late.

To avoid penalties and maintain a good relationship with HMRC, businesses should ensure they submit VAT returns and make VAT payments on time. If a penalty is incurred, businesses can appeal by providing a reasonable excuse, such as an unexpected illness, a computer issue, or an administrative mistake.

One nice way of ensuring your VAT is always paid on time is to set-up a direct debit with the HMRC through your VAT online services account. Its super easy to do, and it ensures you never miss a VAT payment.

Cancelling VAT Registration

A person looking at their bank account to pay VAT penalties and late payments

Businesses may need to cancel their VAT registration under certain circumstances, such as when their taxable turnover falls below the deregistration threshold or when they cease trading. Cancelling VAT registration is a relatively straightforward process, which can be done online or by filling out a VAT7 form and sending it to the appropriate address.

Upon cancelling VAT registration, businesses will no longer charge VAT on their sales and will not be able to reclaim VAT on their purchases.

Summary

Understanding VAT registration and managing VAT responsibilities are essential for businesses to ensure compliance, maximise financial benefits, and maintain a good relationship with HMRC. From selecting the right VAT scheme to keeping accurate digital records and submitting VAT returns electronically, businesses must stay informed and proactive in managing their VAT obligations. By doing so, businesses can focus on growth and success, knowing that their VAT responsibilities are well-managed and under control.

It can seem overwhelming at first, but once you have been VAT registered for a few months, and have filed a few VAT returns, you’ll quickly get used to it and it will start to feel fairly straightforward. As we keep saying though, just ensure you file your VAT returns on time, and don’t pay your VAT late,

Frequently Asked Questions

Do you legally have to be VAT registered?

Yes, you legally need to be VAT registered if your company’s annual turnover exceeds the VAT threshold, which is currently £85,000 (or if you expect to exceed this threshold in the next 30 days). You must register for VAT within 30 days of surpassing the threshold; the effective date of registration is the first day of the second month after going over the threshold.

Do you pay VAT on first £85,000?

No, you do not pay VAT on the first £85,000 of taxable turnover. You must register with HMRC once your turnover reaches this threshold, but VAT is only payable from then on. Once you become VAT registered the HMRC will advise you of your effective registration date. All invoices from this date onwards must have VAT added.

Is VAT registration mandatory in UK?

Yes, VAT registration is mandatory in the UK if your taxable turnover is above £85,000. You can also opt to register for VAT even if your turnover is below this threshold.

What is the VAT registration threshold?

You’ll need to register for VAT when your annual taxable turnover exceeds £85,000, so this is the registration threshold you’ll need to keep an eye on. You will also need to register for VAT if you expect to exceed the threshold in the next 30 days.

Can businesses voluntarily register for VAT even if their taxable turnover is below the threshold?

Yes, businesses with a turnover below the VAT threshold can still voluntarily register for VAT, which can give them access to certain benefits which is mainly being able to reclaim VAT on purchases. However, there are also costs associated with registering for VAT, such as increased administrative time, and ensuring compliance with Making Tax Digital.

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