This article is part of the reference collection published by Harper James. For a growing business, VAT registration is a financial and administrative decision that affects pricing, contracts, invoicing, cash flow and accounting processes.
A business must register for VAT when its taxable turnover exceeds the registration threshold in a rolling 12-month period, rather than only during its financial year. Taxable turnover generally includes sales of goods and services that are not exempt from VAT. It excludes VAT itself and normally excludes exempt supplies. A business must also register if it expects its taxable turnover to exceed the threshold during the next 30 days alone.
The registration deadline depends on how the threshold was exceeded. If the rolling 12-month threshold is exceeded, the business must normally notify HM Revenue & Customs within 30 days of the end of the month in which this occurred. The effective date of registration is usually the first day of the second month after the threshold was exceeded. Different rules apply where the business expects to exceed the threshold in the next 30 days.
A business below the compulsory threshold can register voluntarily. This can allow it to reclaim eligible VAT on business purchases, subject to the normal evidence and recovery rules. The decision also creates additional work, including VAT invoices, bookkeeping, VAT returns and record retention. It can affect pricing where customers cannot recover VAT, particularly consumers and some VAT-exempt organisations.
Before registering, the business should review its customer base, supplier costs, contracts and accounting systems. Contracts should state
whether prices include VAT or whether VAT will be added to the stated
price. A business that quotes fixed prices without addressing VAT may
have to absorb the tax rather than recover it from the customer.
A VAT-registered business must charge the correct rate where applicable, issue compliant invoices, keep appropriate records and submit VAT returns by the relevant deadlines. It must also pay the net amount due to HMRC, or claim a repayment where recoverable input VAT exceeds output VAT. Businesses using digital accounting systems must consider the requirements of Making Tax Digital for VAT.
Registration does not remove the need to monitor turnover. A business that later falls below the deregistration threshold can apply to cancel its registration, although deregistration is not automatic and may create an adjustment for assets or stock on hand. Thresholds, schemes and filing requirements change, so the business should verify the current HMRC rules before acting.