If your business earns over £85,000, you must register for VAT and charge clients Output VAT added to the selling price, collect the money, and then remit it to HMRC.
A lot of services and products sold in the United Kingdom and those imported from other European nations are subject to value-added tax, or VAT. When starting a business, many entrepreneurs wonder whether they must sign up for Value Added Tax.
For certain companies, becoming VAT-registered can create difficulties. Businesses that sell to consumers and are VAT registered charge 20% on top of their selling price. Their rivals not registered for VAT might seem 20% cheaper and more competitive.
If your pricing strategy is market-based, you might lose customers and money. Is there a way to therefore manage the process of registering for VAT?
UNDERSTANDING THE VAT REGISTRATION THRESHOLD
When you reach or anticipate reaching the VAT threshold, you must register for VAT. This shows that if your company’s annual revenue is more than £85,000. You must register for Value Added Tax.
In the same way, you must register if you have or anticipate having monthly earnings that will be more than £85,000. You must be aware of your yearly turnover and any adjustments to the VAT threshold.
If any of the following apply, you must register for VAT:
- You are forecasting almost £85,000 in Sales in the Following 30 Days
- You have a VAT taxable turnover of more than £85,000 in the previous 12 months (the VAT threshold)
The independent of VAT taxable turnover also requires registration:
- You’re not local to the UK
- Voluntary registration for VAT is available to businesses with an annual revenue of less than £85,000.
- If you sell anything to the UK (or expect to in the next 30 days)
- You have a company that is not headquartered in the UK.
- From the date of your registration with HMRC, you are responsible for paying any VAT due to the government.
NOTE: You do not need to register for VAT if your sales fall within the VAT exemption category. (Under £85,000)
If you expect to go over in the following 30 days,
The yearly amount of your VAT taxable revenue must exceed £85,000 during the following 30 days for you to be required to register for VAT.
There is a 30-day window when you must register. You must register as of the day you realised, not the date your revenue exceeded the criteria.
WHO IS NOT ELIGIBLE FOR A VAT NUMBER?
You can only register for VAT if your organisation qualifies as a business under HMRC’s definition.
If your company typically deals primarily in VAT-exempt products or services, you are also not eligible to register.
CAN YOU OBTAIN A VAT NUMBER VOLUTARILY?
The answer is yes. It is possible to voluntarily register for Value Added Tax even if your company’s current taxable turnover is below the current threshold.
A company could decide to sign up for Value Added Tax for a couple of reasons.
Since most of their customers are also VAT-registered firms, it is of little consequence to them whether or not their clients are VAT-registered.
The company benefits from being VAT registered since they often get refunds from HMRC.
WHAT IS THE VAT REGISTRATION THRESHOLD FOR 2023?
The first step in determining whether your company has to file a VAT registration is assessing whether or not it has reached the VAT threshold. The value-added tax threshold is the point at which a company must decide whether or not to register for value-added tax. For the fiscal year 2023/24, the UK VAT threshold is £85,000.
Determining whether you’re over or below the VAT level is easy. To determine your company’s VAT threshold, apply the following steps:
Calculate your Taxable Income
Your taxable turnover is the funds you make from selling VAT-eligible products and services. You must first determine the overall value of all of your transactions including the VAT calculations and add that amount to the total. This will determine the taxable turnover.
Verify your services or products VAT Rate:
The value-added tax (VAT) is charged at varying percentages for specific categories of purchases. Find out whether your products or services fall under the ordinary VAT rate, the reduced VAT rate, or the zero VAT rate. If you are unsure, please contact us here at Makes Sense.
Do not count exempt purchases
The value-added tax (VAT) does not apply to all transactions
As the previous year’s taxable turnover determines your VAT threshold, all revenue generated during that period should be included.
These transactions should not be included in your sales taxable total.
Sales figures from the previous year should be included if applicable.
When determining your taxable output, you may check whether it exceeds your country’s VAT threshold to decide if you must register for the tax. If your taxable sales exceed the VAT registration threshold, you must register for VAT. Voluntary registration is an option if your taxable revenue exceeds the VAT threshold.
NOTE: You must maintain precise records for revenue and expenditures. It is essential for accurately determining your VAT threshold. You should also check your revenue regularly to keep track of any shifts that influence your need to register for Value Added Tax.
CAN I DEREGISTER FOR VAT?
If your company’s VAT taxable revenue drops below £83,000, you may request that HMRC revoke your VAT registration. You must revoke your registration if you are no longer qualified to be a VAT-registered business.
This might happen if you cease doing business, reduce your VAT-taxable sales, or join a VAT group. When no value-added tax is collected from the customer, this does not apply to VAT-exempt products and services.
You can contact us here at Makes Sense we can discuss in depth for more details
Ideas some businesses use to manage the compulsory VAT registration process
These are some methods that companies employ:
- Encourage the buyer to purchase major material.
- If his sales are down, he still makes a profit.
- Forced Sales Reduction by closing shop for a few days.
- Although certain shops charge VAT on their hot meals, they have very little input VAT to claim back. Closing for one lunchtime to keep their turnover low helps them avoid exceeding the VAT threshold.
- Large contracts or work items different from your usual business activity might be disregarded under the law when calculating whether or not your turnover has exceeded the threshold.
- One-off projects do not Count
- There has been a significant shift in your company.
- This is certainly subjective, but if your typical annual sales are £60,000 and you had a one-time contract for £15,000, that isn’t the type of job you generally do (and won’t do again), you can avoid having to register.
- A company that just moved above the VAT barrier but had also lost an employee recently that would not be replaced would be able to argue reduced sales due to reduced capacity and, therefore, fewer sales as a reason to not register for VAT.
WHAT TO DO WHEN DOING ONE-OFF PROJECTS?
Based on the assumption your business has a stable income of £6000 per month and will continue its operations at this level indefinitely.
You have one-off project worth up to £2,000 offered by a local authority. The work is related to the field but is beyond the scope of your daily tasks.
The local authority will make the final payment once the project is complete. This implies that the VAT levied on your total payment will all be charged in one quarter, which makes the VAT taxable turnover breach the VAT threshold (£85,000).
Find Whether the Activities Are Business or Non-business related:
If you don’t intend to register your business for VAT because you think the threshold will not be achieved again? Here is what you can do.
When considering the VAT threshold, you will need to ask yourself whether you need to factor in the extra sales revenue. If the answer is yes and you can prove that the extra activities carried out are except from VAT or is unrelated to the business, you can avoid registering for VAT
But you should expect tough questions from HMRC as they want you to clarify your position.
Please contact Makes Sense if you are unsure on whether to register for VAT and also what you can claim on not. Our qualified VAT specialists can help with all of your VAT needs.
NOTE: HMRC has introduced six tests to help determine whether your income is business or non-business related; you should review your income in line with these before making a decision.
If HMRC is convinced that the income earned is non-business related, request them to put it in writing to keep evidence, which you are expected to show for tax-related inquiries in the future. Again, if you are unsure, please do not hesitate to contact Makes Sense for our expert advice.
WHAT IF YOUR INCOME IS DECLARED BUSINESS-RELATED?
If your income from the one-off project has been declared business-related. You will then need try to convince HMRC that your business expects its future taxable turnover to decline below the HMRC VAT deregistration threshold, which is £83,000 for the tax year 2022/23. You must provide all the relevant information and documents to strengthen your case, as your decision depends entirely on HMRC.
WHAT THE VAT RATES FOR 2023?
Standard Rate – 20% – VAT is often charged flat 20%. Most services and products fall within its purview.
Reduced Rate – 5% – Products and services in the health care, fuel, heating, and child passenger safety industries, among others, are eligible for the 5% VAT rate reduction.
Zero Rate – 0% – Most food, books, and clothing for kids fall under “zero-rated” products and services. Even if no VAT is collected on sales of certain products, they must still be recorded on your VAT return. Charitable events that meet the criteria for exemption from VAT.
WHAT ARE VAT EXEMPTION GOODS?
In some cases VAT is not applied to the sale of items included in the VAT exemption category.
We have given a some examples:
Finance
In most financial services transactions VAT is not charged. Although, other services directly connected to financial services, such as accounting, debt collection, management consultation, investment, finance, and tax advice, are often not exempt from tax.
Land
In many construction and real estate deals VAT is not required. Most land and buildings used for commercial or industrial purposes are exempt from VAT, but in some circumstances, companies choose to have these types of properties taxed at the standard VAT rate. The phrase “option to tax” is describes in the cases.
Future sales of real estate and any other supply made by the elector shall be subject to the usual rate of taxation. Choice to tax may be cancelled but, only under a few conditions exercised, although careful thought must be given before hand.
Literacy and Learning
Higher learning Institutions are free from charging value-added tax on their instructional and related services.
Insurance
VAT does not apply to majority of all insurance dealings. Insurance Premium Tax, however, may be due on some insurance premiums.
Postal Service
VAT does not apply to universal service obligation-related public postal services supplied by the Royal Mail. The VAT rate on all other postal services is the regular Rate.
Welfare and Health
Medical Treament or Care supplied by a qualified institution, such as a hospital, hospice, or nursing home, and health services performed by licensed physicians, dentists, optometrists, pharmacists, and other health professionals are exempt supplies under VAT.
Investing in Gold
When purchasing gold coins for investment purposes these are not subject to VAT.
Sport
Services given by qualifying organisations in sports and physical education and participation in certain athletic and leisure events will qualify for the exemption.
Culture
Public or other Cultural entities that meet the requirements are exempt from charging VAT for entry fees.
Charity Auctions and Dinners
Charities will try to avoid paying sales tax on some fundraising activities.
Gaming
Generally, betting and gaming establishments, bingo halls, and lottery sales are VAT exempt. Yet, there are a few situations when you must account for VAT, for example charging customers to enter a location that offers betting and gaming.
HOW CAN AN ACCOUNTANT LIKE MAKES SENSE ADD VALUE?
Setting up your business comes with many financial and managerial responsibilities. You can deal with many responsibilities, but managing all business aspects together takes time and a lot of effort. These aspects can range from growing your business and strategies to working out taxes and managing the business finances. While you may be excellent in one key aspect of your business, it does not imply that you will also be exceptional in managing other crucial aspects.
In this scenario, where your business has yet to register for VAT or plans to register it, you should hire a professional VAT accountant or speak to one.
Our professional accountants here can work out your VAT liabilities accurately by identifying the correct vat treatment for various items used in your business and advising on suitable methods to make the VAT process efficient.
CONCLUSION:
If your business’s taxable revenue exceeded £85,000 in the previous 12 months, you must register for Value Added Tax. Before you register for VAT, consider the above-mentioned scenarios where you might not have to register. If you follow the methods mentioned, you may identify times when your business does not need to register for VAT.
Lastly, you cannot avoid registering for VAT every time your revenue approaches the VAT registration threshold. HM Revenue & Customs use anti-avoidance strategies that can pick up incorrect VAT dealings very efficiently.
No matter what you decide, it would be best if you got the counsel of a qualified accountant before implementing any VAT-related procedures.