Our Guide To VAT Registration And Reporting

Whilst VAT is unavoidable, it can be confusing for business owners to get a full grasp of. However, the quicker someone understands the registration and reporting process, the better. Here is our guide to VAT registration and reporting.

An Introduction to VAT 

VAT (Value Added Tax) is a tax that is charged on the majority of goods and services in both the UK and the EU. VAT is automatically included in the price of goods sold in shops.

The Standard Rate is 20% as of 4^th January 2011 which is applied to most goods and services. The reduced rate is 5% and this applies to certain goods and services such as home energy or children’s car seats. Zero rate which is for items such as food and children’s clothes. Finally, some items are completely exempt from VAT and include postage stamps, financial, and property transactions.

Whilst exempt and zero rates seem like the same thing, there is a subtle but substantial difference. Whilst zero-rated goods have 0% VAT, the goods are still VAT taxable. This means that the sales from these items still have to be recorded and reported on all VAT accounts and VAT returns. This is not the case for exempt items.

VAT Registration  

Whilst limited companies are required to register for VAT, VAT registration is also open to sole traders. So, regardless of the ownership structure of a company, VAT is a possibility.

It is a legal requirement for VAT when a business:

• Has a VAT taxable turnover of £85,000 or more over a 12-month period

• Expects their VAT taxable turnover to exceed the threshold in a 30-day period.
• Only sells goods and services that are exempt from VAT, however, items are purchased for the business to the value of more than the threshold from VAT-registered suppliers.

If a business meets any of these criteria, they are required to register for VAT within 30 days. If you fail to notify HMRC within this time frame, the business is liable to potential penalties.

Once a business’ turnover reaches the VAT threshold in a 12-month period, it must start charging VAT from the first day of the second month after it exceeded the threshold. If a business forecasts that it will exceed the threshold in a 30-day period, you must start charging VAT immediately.

Delayed Registration  

If a business fails to register in time, HMRC will retrospectively register the business from the date it should have started to charge VAT. A business will need to add VAT to all sales made from this retrospective date, even if you didn’t actually charge the customers VAT at the time, and therefore can mean the business loses out. This scenario highlights the importance of a business registering for VAT at the correct time.

Voluntary VAT Registration 

There are several reasons why a business may decide to voluntarily register for VAT as opposed to waiting until it’s a legal requirement. Being VAT registered means:

• The business can reclaim the VAT on any business expenses
• A business can register for a reduced Flat rate of VAT to reduce the admin involved in  preparing your quarterly VAT return

• Being VAT-registered can make a business come across as more credible in the eyes of its clients and customers.

Bear in mind that there will also be times when volunteering for VAT may not be the best option. For example, businesses that are VAT registered are required to complete a VAT return regularly (usually every quarter) and this may not be an additional responsibility a business has the time for. Failing to file the VAT returns will result in penalties.

How to register for VAT 

To register for VAT head to Gov.co.uk which outlines how to register. Alternatively, your online accounting software can help you register. The business will need to determine whether to register for the standard or flat rate VAT.

Standard rate is when VAT is reclaimed on every eligible item the business sells or buys. The Flat Rate VAT is available for businesses with an expected turnover of less than £150,000 a year and the aim is to help simplify VAT for small businesses. You can determine which scheme is best for a business by looking at the turnover, the types of clients they work with, and which expenses and purchases they can claim VAT on.

VAT Reporting  

Once you have chosen or had to become a VAT-registered company, you will need to get to grips with the reporting that comes with it. VAT returns will need to be filed every 3 months and failing to do so will incur a penalty from HMRC. This will show how much VAT a business has paid and received during that time period. All VAT returns are filed online and most accounting software has the capability to file the VAT return for you.

If you have any questions regarding becoming a VAT-registered company or VAT reporting, please get in touch with a member of the Wright Vigar tax team. We will be able to discuss whether becoming a VAT-registered company is the best route for you and discuss the options.