When Should a New Business Register for VAT?

When Should a New Business Register for VAT?
Businesses have to register for VAT when their taxable turnover exceeds the VAT registration threshold (currently £77,000 p.a.).  The turnover is measured over a “rolling” twelve-month period, not the calendar year, or the annual accounts year.  Where a business has not been trading for twelve months, it will be all of its taxable turnover to date.  When measuring taxable turnover to decide if it needs to register for VAT, it should include all sales that would be subject to VAT at the standard, lower or zero rate.  The business should exclude exempt supplies, sales that are outside the scope of UK VAT, one-off sales of capital assets, and non-business supplies.

Once a business is liable to register for VAT, it must inform HMRC within 30 days of the end of the month.  HMRC will then register it from the end of the following month.

Points to consider

A business can also register voluntarily below the limit or as an “intending trader” even before they start trading. But why would they want to? Timing when to register for VAT can be the most important decision a new business has to make.  The main points to consider when deciding when to register are:

If you don’t monitor your turnover and register too late you will incur penalties, which, under the standard penalty regime could be in the range of 0 – 100% but realistically would be in the range of 15%–30%.

Registering early could increase input tax recovery or improve cashflow.

Conversely, registering early could result in paying too much output tax or reducing competitiveness or profitability.

If the sales of a business are below the VAT registration limit it can still apply to register for VAT voluntarily. Voluntary registration is really only recommended for businesses that either trade with other VAT registered businesses (as they can recover the VAT that you charge them), or for businesses that will only make zero-rated supplies (where VAT is not charged, but the VAT on purchases can all be reclaimed) so that the business is receiving repayments from HMRC.  

An intending trader registration is not intended just to allow a business to recover input tax without ever making any taxable supplies. There is one thing to remember; if you don’t ultimately make any taxable supplies because the project falls through, HMRC may be able to take back all the VAT that has already been reclaimed.  A business is entitled to register for VAT at the start of a project, even if it may be several years before it produces taxable outputs, provided that it can show that it has genuinely started a business. 

If you want to register as an intending trader HMRC will want to see proof that you intend to make taxable supplies so send them as much information as you can with the registration form to speed up the process.  For example business plans approved by your bank, draft contracts etc.

Registering as an “intending trader” can be useful for businesses that have a long “lead in time” between setting-up the business and actually making their first taxable supply.  An example of this would be a property development business that takes time constructing a property, incurring VAT costs all the time, but is unable to make its first taxable supply until the construction work is complete.

A business does not want to register for VAT if it sells mostly to the public, as charging VAT means that it must either increase its retail prices or reduce its profits.

When dealing with other businesses being VAT registered may give an increased credibility, which will make it easier to sell to them.  If a business is not VAT registered potential customers may think that it is only a small business (which it is) and prefer to trade with larger businesses which they may consider to be longer established or more credible.   Being VAT registered can give the illusion that the business is more substantial and well established.

Businesses only have limited rights to recover input tax retrospectively, so think about the date you want to register as you can normally only go back 4 years for recovering the VAT on goods still on hand at registration and 6 months for services.   A business can ask for a retrospective voluntary registration at the time of its application for registration. This can be backdated up to 4 years.  In effect it can then claim back VAT incurred up to eight years ago on goods still on hand on its first VAT return (backdating the registration 4 years and then being able to go back another 4 years prior to the registration date).  Once a business is registered for VAT any application to retrospectively backdate it so as to recover VAT incurred earlier will be refused so a business will need to consider its “effective date of registration” when it registers as it cannot be changed at a later date.

Too soon…or too late?

If a business miscalculates its sales and registers too early, it cannot subsequently demand retrospective deregistration. In the case of N Goodrich t/a UYE Tours (LON/01/584 No 17707) the trader should have used the Tour Operators’ Margin Scheme (TOMS).  He thought he had to register for VAT because his total sales exceeded the registration threshold whereas when subject to TOMS, it is only the profit margin which counts towards the registration threshold not the total turnover.

Although HMRC repaid the VAT on the difference between his profit margin and his sales values, it still left a substantial sum of VAT owing on the profit margin.  As that margin had been below the limit, he never needed to register. However, having done so, his registration was, in effect, voluntary. It could not be cancelled retrospectively in order to get back the VAT paid unnecessarily.

In the case of Mark Mills-Henning v Revenue & Customs [2012] UKFTT 444, the business exceeded the VAT registration threshold following a short period of increased sales.  He did not notice this at the time but his accountant picked it up when preparing the annual accounts.  The accountant noticed that the turnover had fallen again and that as such he was again below the VAT registration threshold so need not register for VAT under para 1(3), Schedule 1 of the VAT Act 1994 which allowed exemption from registration based on anticipated future turnover being below the limit.  

To benefit from the exemption at para 1(3) he should have notified HMRC when he exceeded the VAT registration threshold and supplied details of his predicted turnover so that HMRC could decide if para 1(3) applied.  Unfortunately, his accountant made the decision himself without reference to HMRC so when the actual registration was processed HMRC could not take into account the predicted fall in future turnover as they had not received the information at the correct time.  

As a result, the tribunal agreed with HMRC that the registration was due from the date he exceeded the registration threshold.  This is an important reminder to monitor your turnover and if you think that your increased turnover is only a “blip” you must give HMRC all the facts in a timely manner so they can decide if exemption from registration applies. 

Practical Tip :

If you have a new business and incur a lot of VAT on set up costs or trade with other businesses you can register for VAT early and claim the VAT back, however, if you sell to the public it is better to remain unregistered as long as possible.  

Andrew Needham