Are you a sole trader who has experienced growing success in your business? It’s fantastic when all of your hard work starts to finally pay off, but with success comes new liabilities. With newfound success comes a responsibility to register for VAT, and failure to do so may result in financial penalties.
At Tax Driven Accountants, we have supported countless businesses with tax planning in the UK and have a deep understanding of VAT registration and the requirements businesses must fulfil to remain compliant. We also offer our own VAT services.
In this guide, we will outline exactly what VAT is, the VAT threshold and how UK businesses can register.
Keep reading to find out more.
What is VAT and Why Does it Matter?
VAT (Value Added Tax) is a consumption tax added to most products and services sold by VAT-registered businesses and is paid by the final consumer as part of the retail price.
VAT is charged only on the value added to a product at each stage of its production and is a cornerstone of public finances, accounting for a substantial share of national tax revenue, which is then used to fund vital public services.
For businesses, being VAT-registered gives them the right to claim back the VAT they have paid on business expenses, allowing for better cash flow management and tax efficiency.
The VAT Threshold – When Should You Register?
The current national threshold for VAT registration in the UK is £90,000, and if your business’s turnover exceeds this threshold, you are legally required to register for VAT. Failure to do so may lead to severe financial penalties.
Businesses also have the option of Voluntary VAT registration.
Voluntary VAT Registration – Is it Worth it?
Even if your business is below the VAT threshold, you still have the option of Voluntary VAT registration. Many businesses choose to register for VAT, which can make a small business appear larger and more established, while also ensuring they are prepared ahead of the mandatory registration deadline and can avoid fines by removing the risk of missing it.
B2B Businesses
If you are a business-to-business trader who works with VAT-registered clients, they can claim back any VAT charged to them, allowing you to keep the cost of your services the same while benefiting from reclaiming VAT, so Voluntary VAT registration may, in fact, be beneficial for your business.
It is important to note that, though beneficial to B2B traders, becoming VAT-registered increases administrative responsibilities, so you may need to work with an accountant to manage your VAT responsibilities.
B2C Businesses
However, registering for VAT prematurely as a business that sells directly to the general public may negatively impact your business, as it would mean you would have to charge an extra 20% VAT on your goods or services, which would naturally increase your trading prices and potentially put off customers.
As a small business, losing your competitive edge can adversely affect your overall success and stunt any further growth.
VAT Schemes
If you are considering becoming a VAT-registered business, you can use VAT schemes to simplify bookkeeping and ease the administrative burden of being registered. It is important to remember that these schemes do not change the underlying legal VAT rates you must charge customers.
These schemes include:
Flat Rate Scheme
The Flat Rate Scheme allows eligible businesses to pay a fixed percentage of their annual gross turnover to HMRC, saving them the effort of calculating their individual and output VAT. This basically means that you can charge your customers or clients the standard VAT rate and keep the difference.
To be eligible for this scheme, your annual VAT-taxable turnover must be £150,000 or less.
Cash Accounting Scheme
If you operate a business that often faces the issue of having to chase your clients for payment, it can be really frustrating, especially if you have VAT compliance to meet. Businesses can end up in difficult financial situations, and this is where the VAT Cash Accounting Scheme can be helpful.
This scheme allows businesses to pay VAT only when customers pay for goods and services, rather than when the invoice is initially issued. You can join this scheme if your expected VAT taxable income turnover is £1.35 million or less, and you are ineligible for this scheme if you are behind on VAT returns, have committed a VAT offence in the last 12 months or already use the Flat Rate Scheme.
Annual Accounting Scheme
The VAT Annual Accounting Scheme allows businesses to submit only one VAT return per year, instead of the four that are expected.
As part of this scheme, throughout the years, businesses make advanced, estimated payments towards their VAT bills, followed by a final balancing payment (or sometimes a refund) once their annual return is submitted.
This scheme helps streamline administrative tasks and simplify budgeting by spreading out payments, but it still comes with challenges, so it is recommended that you work with an accountant who understands the scheme and can help you remain compliant.
How to Register for VAT with HMRC
Interested in becoming a VAT-registered business? Here are the steps you need to follow to do so.
Set up an Account
To get started, you will need to create a Government Gateway account if you do not already have one. Head to the HMRC website and select ‘Register for VAT’, which will prompt you to sign in or create an account. You will need your business details to hand, including your business type, address, and the date you need to register from.
Complete the Online VAT1 Form
Once your account is set up, you will need to complete the VAT1 form online. This is where you will provide HMRC with key information about your business, such as your expected turnover, the nature of your business activities, and your bank details.
It is worth taking your time here, as errors or missing information can slow the process down.
Working with an accountant at this stage is strongly recommended, as they can ensure your application is accurate and that you are registering under the most suitable VAT scheme for your business from the outset.
HMRC Confirmation
Once your application has been submitted, HMRC will review it and issue your VAT registration certificate, known as a VAT4. This will confirm your VAT number, your effective date of registration, and the deadline for your first VAT return.
Processing times can vary, but you should typically expect to hear back within 30 working days. In the meantime, you are still required to charge VAT on any applicable sales, so it is important to keep records from the moment your registration takes effect.
Set up Making Tax Digital
All VAT-registered businesses are required to comply with Making Tax Digital (MTD), which means keeping digital records and submitting VAT returns using HMRC-approved software. Once your VAT number has been confirmed, you will need to sign up for MTD and link your account to compatible software.
If this all sounds like a lot to navigate, that is because it is. A tax-driven accountant can help you choose the right software, get everything connected correctly, and make sure you are set up for smooth, compliant filing from day one.
What Happens if You Register Late?
Registering for VAT late will result in HMRC backdating your registration to the date that you should have registered, and you will be required to pay the uncollected VAT on sales from that date. If you haven’t charged VAT in that time, you will essentially be paying the VAT out of your own pocket, which could significantly impact your business, so it is important to register as soon as you are required to do so.
Failure to Notify
Under HMRC’s ‘failure to notify’ rules, penalties for late registration are determined based on a percentage of the VAT you owe. The amount of the fine varies depending on how late the registration is and whether HMRC considers the mistake to be deliberate.
Non-deliberate
Whether you didn’t understand the rules or simply missed the deadline, you may be charged 0-30% of the VAT owed.
Deliberate
If you deliberately missed the registration deadline, you will be charged 20-70% of the VAT owed.
Deliberate and Concealed
If it is found that you not only deliberately missed the deadline but also tried to conceal the fact, you will be expected to pay 30-100% of the VAT owed.
With all these penalties, HMRC may reduce them if you come forward and cooperate with them, but it is always a good idea to have an accountant on your side to ensure that you’re staying on top of your tax obligations.
Stay Compliant With Tax Driven Accountants
Through this guide, you should now have a better understanding of VAT registration in the UK. At Tax Driven Accountants, we have seen the consequences of missing registration deadlines, failing to file VAT returns and the confusion that can come with VAT registration. It can be easy to make VAT mistakes.
Are you a small business that needs support when handling VAT? Get in touch with us today.
