How do you know when you should register for VAT?

This can be a really tricky question for business owners - and something that is often feared and actively avoided.

Here are some facts:

  1. In the last 12 months, your taxable turnover goes over £90,000. Now that’s not in your last financial year. It’s in a rolling 12 month period. That means, you need to pay attention to your sales on a monthly basis.

    What I would suggest is once you are trading at £5,000 or more per month, just diary, once a month, to go and look at last month’s sales. Keep a spreadsheet to add in last month’s sales - and then add up the last 12 full months.

    Also - if you know that your sales will go over £90,000 in the next month, you also need to register for VAT. So if you get a whopping contract that will take you over the threshold - great news - but register for VAT.

  2. It’s not optional. You don’t get to choose. If you meet the criteria - you should register.

  3. Once you know you have to register, you have 30 days from the end of the month when you go over. So if you go over the threshold on 15th January, you have to register by the end of February - and your effective date of registration will be 1st March.

  4. Be wary of trying to avoid VAT registration. Sometimes we are asked if registration can be avoided where the business can be split in two. No. This is known as VAT disaggregation. HMRC don’t like it and will assume you are doing that to avoid VAT registration.

    You would need to show the two businesses are not connected at all for this to be a reasonable course of action.

Things to consider - which might help:

  1. Register for VAT voluntarily. Depending on your customers - it may well be beneficial to register for VAT from the outset - or at least early. If your customers are businesses, they may well also be VAT registered, so there won’t be a huge impact. You can recover VAT from the outset on everything you buy from VAT registered suppliers.

    You do have an admin element to consider. You might want to get advice around registering, or around managing VAT on an ongoing basis - but this can, overall, be a good move.

  2. Price for VAT from the outset. If you sell largely to customers - and you want to avoid suddenly putting your prices up by 20% to account for VAT - then why not set out to charge the VAT element from the outset. This gives you some flexibility to be test pricing, take the additional profit and play a little.

    If you’re going to do this - then take the additional 20% of income - and split it out, either in a separate account, or in your profit and loss.

  3. Consider the Flat Rate scheme

    If your accountant doesn’t talk to you about the flat rate scheme - then ask. This can be a great scheme to consider to minimise the admin required around VAT.

    Instead of counting 20% on all sales - and deducting 20% of your purchases, the flat rate scheme works by working out a smaller % on sales only. You don’t need to keep VAT receipts from suppliers - and in your first year of registration, you get a 1% reduction on your liability.

  4. Remember to go backwards.

    Once you have registered for VAT, you have the right to go back in time and claim VAT on goods you have bought up to 4 years ago. You have to have bought them from a VAT registered supplier (and you’ll need the paperwork) plus you will need to still be using them. It could be furniture, shop fittings, machinery.

    You can also reclaim VAT on services you have bought in the last 6 months.

On an ongoing basis, make sure you are reclaiming as much VAT as you are allowed to:

  1. Keep your paperwork - unless you are on the Flat Rate scheme.

  2. Reclaim VAT on qualifying personal expenses. If you work from home - and your office space takes up 10% of your house, then recover 10% of the VAT on your utility bills. You need to keep evidence of how you’ve calculated the business use, but this is often forgotten.

  3. Make sure you are reclaiming VAT on fuel - or cars. This can be a bit complex, but speak with your accountant or bookkeeper and make sure you are recovering all the VAT you may be entitled to.

It’s worth seeking advice from your accountant or bookkeeper. This can be complex and they are there to help you.

Rosie Berridge