VAT Registration, VAT Deregistration, Voluntary VAT Registration

VAT Registration (Last Updated 7th May 2009)

Becoming VAT registered can be a daunting task for the new entrepreneur , but handled correctly VAT needn’t be a worry.

The first thing to say about VAT is that you must register for VAT if:

· Your VAT taxable goods and services supplied within the UK for the previous 12 months is more than the current threshold of £68,000. (Correct May 2009)

· Or if you expect to supply VAT taxable goods and services supplied within the UK in excess of £68,000 in the next 30 days alone.

Note that the figure of £68,000 relates to turnover and not profit.

One other point to bear in mind is that you do not have to reach the above limits to register. You can voluntarily register at any time and sometimes it can be advantageous to do so.

There are many VAT rules that cannot be explained here. If you are unsure you should seek professional advice.

Why Register Voluntarily?

Registering before you reach the thresholds or at any time means that you can account for VAT on sales and claim back VAT on purchases. The primary consideration for registering for VAT voluntarily is generally the nature of your customer base. Are your customers VAT registered? If they are, then when you charge VAT they simply claim the VAT back from the VAT man and suffer no additional cost. You are then free to claim back VAT on your purchases effectively making your VAT purchases 13% cheaper. (At a VAT rate of 15%)

If the bulk of your customers are not VAT registered then this may put your business at a competitive disadvantage as your customers simply have to pay the additional VAT and cannot claim it back. This could make your services more expensive than non VAT registered businesses.

Note that if the above thresholds are reached then you MUST register for VAT.

Principles of VAT

When you become VAT registered, the first thing that many businesses notice is the increased administrative burden. VAT returns have to be made every three months and this means that the financial organisation of the business needs to be good. This generally means operating a competent financial system and recording transactions on a regular basis.

It is always a good idea to operate a financial system, but non VAT registered businesses are able to get away with a system that is not regularly updated.

VAT returns have to be submitted for three monthly periods and within 30 days of the end of a three month period.

Note that when recording sales and receipts in an accounting system for VAT registered business, the VAT is not a tax deduction and is not included in your sales figures.

For example, you make one sale of £10,000+ VAT (£11,500) and one purchase of £5,000 + VAT (£5,750), the profit for the period in accounting terms is £5,000. (£10,000-£5,000)

The VAT that would have to be paid would be £750. (£1,500-£750)

You have therefore ‘saved’ the VAT on the purchase as you received in cash terms £1,500 extra from your sale, but only paid £750 over to the VAT man!

Flat Rate VAT Schemes

Flat rate VAT schemes are available for small business, those with a turnover less than £150,000, that can save the business time and effort looking after VAT. In some circumstances you can make extra money from operating a flat rate VAT scheme.

Note that profits from operating a flat rate VAT scheme are taxable.

In a flat rate VAT scheme you agree with HMRC to pay a certain percentage of VAT over no matter what the actual calculated amount of VAT is.

The HMRC agree a percentage according to your business type. For example if that rate is 6% then you would automatically pay 6% of your VAT taxable supplies, (Including VAT), to HMRC.

Using the example above you pay £10,000 + VAT x 6%. (£11,500 x 0.06) This equals £690 and you can see that this is less than the £750 in the standard scheme as demonstrated above. The business has therefore saved an extra £60 and has now made profits of £5,060.

Further to this, newly registered business can receive a discount of 1% on their agreed rate for the first 4 VAT returns only, effectively for one year.

Using the above example again, you would pay £10,000 + VAT x 5%. (£11,500 x 0.05) This equals £575 and saving of £175.

It is very important to note that this can work against you and you could end up effectively losing out if your VAT purchases are high.

If you change your mind about being on a flat rate scheme, you can come off the scheme, but cannot resume on the scheme for at least one year.

It is therefore important to make some estimations before making the decision to go on the flat rate VAT scheme to ensure it is going to be beneficial.

Of course using the scheme has it advantages in being much more simple than the standard VAT scheme.

Note: Even when on a flat rate VAT scheme, you should still keep full and proper accounting records and retain receipts and invoices.

Cash Accounting VAT Scheme

This only applies when you are on a standard VAT scheme, you cannot use this scheme if you are already on an alternative scheme.

This scheme basically means you do not have to pay VAT over unless you have physically received the payment. Thus if your customers do not pay you on time, you do not have to pay the VAT until they pay you.

The downside of this scheme is that you cannot reclaim the VAT on purchases until you have physically paid the invoices you have received. This can be a problem if you have negotiated very favourable credit terms.

Again you should run some scenarios and consider very carefully the implications of joining this scheme.

Annual Accounting VAT Scheme

This only applies when you are on a standard VAT scheme, you cannot use this scheme if you are already on an alternative scheme.

Under this scheme, you pay nine monthly installments or three quarterly installments and once year you pay any balance that would have been due.

If you choose to pay your VAT by nine monthly instalments, each payment will be 10 per cent of the total amount of VAT you paid to HMRC in the previous year, or 10 per cent of the estimated total annual amount of VAT due to HMRC if you have been registered for VAT for less than 12 months. Your payments will be due by the end of months 4 to 12 of your annual accounting year.

If you choose to pay your VAT by three quarterly instalments, each payment will be 25 per cent of your previous year's VAT liability, or 25 per cent of your estimated VAT liability if you have been registered for VAT for less than 12 months. Your payments will be due by the end of months 4, 7 and 10 of your annual accounting year.

This is advantageous as you can pay a fixed amount during the year and then a balancing amount at the year end.

Other Schemes

There are other specialist schemes available.

And finally, YES, we can help you if get a problem in this area.