VAT Registration - Tips and Traps

For a growing business, registration for VAT is compulsory when the annual turnover, calculated to the end of any month, exceeds the registration threshold, currently £60,000 (£61,000 from 1/4/2006). It is important that the turnover is carefully monitored, so that registration can be effected promptly. A common mistake is either to wait until the end of a calendar quarter, or, worse, to wait until the annual income tax return.

There is a further rule, sometimes missed, where registration is obligatory based on future turnover. This applies where a person expects that, in the next 30 days, his turnover will exceed the threshold, again £60,000. The 30 day period can start at any time. This rule will affect a person where a large contract is under discussion with a customer. Under this rule, registration is required immediately, so that the large contract, for example, will be subject to VAT.

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Where a person fails to notify his liability to register for VAT, he is liable to a penalty. This is calculated at 5%, 10%, or 15%, depending on the delay between the date of registration and the date HMRC received notification. 5% applies up to 9 months, 10% from 9 to 18 months, and 15% for a delay over 18 months.

Since postal and other delays seem to occur all too frequently, a copy of the notification should always be kept, and a note made of the date on which it was despatched. A penalty can be mitigated or cancelled in total if there are genuine circumstances which prevented the person from submitting his Application at the correct time.

Regulations allow a person to reclaim input tax incurred prior to registration. Although this may be seen as a concession, it gives an effective statutory right to such input tax. The conditions attached to the making of such a claim are found in VAT Notice 700, section 11. This provision can be very helpful for a growing business.

Where the input tax relates to goods purchased, they must have been purchased within three years of registration, have been obtained for the purpose of the business which is registered, and still held in stock. A stock account of the goods will need to be completed, and proper VAT invoices must be maintained.

This necessarily excludes goods that have been consumed before registration, such as petrol or electricity. (I suppose the petrol in the tank on the date of registration is deductible!) However, it does include goods that have been incorporated into other goods, such as office improvements, computer upgrades, etc.

The rules for services are slightly different, as a claim can only go back six months. Again those services must relate to the business which is registered for VAT. And again, a record of such services should be prepared.

A claim for input tax under these rules must be made on the first VAT return. In practice, such a claim can be prepared at around the time the business is registered, so that the necessary evidence can be collated, and the stock account prepared. Where the amounts of input tax are significant, HMRC may wish to verify the claim before making repayment. Where such a claim is submitted, it is good practice to prepare relevant information so that any check can be made easily.

A person who is not obliged to register can choose to do so. He has to satisfy HMRC that he is carrying on a business, or intends to carry on a business, and that he is making taxable supplies. Satisfactory evidence will need to be provided. Usually a covering letter is helpful, to pre-empt any questions that HMRC may wish to ask. As many as 20% of all VAT registered businesses fall into this category. The principle advantage lies where a business deals mainly with other VAT registered businesses, as it can claim input tax to which it otherwise would not be entitled.

Closing comment: VAT Notice 700/1 para 2.2 indicates that a person who is granted exception from registration is not “immune” from a liability to register in the future. Perhaps the Commissioners of Revenue & Customs consider registration an illness, requiring immunisation!