Registration – compulsory or voluntary
If the company turnover (i.e. gross income) is less than £85,000 (2019-20 figures) then registration is optional, over £85,000 it is compulsory. Once registered you add VAT at 20% onto the invoices you send your client/agency, and claim VAT back on allowable expenses. The difference is paid to HMRC at the end of the quarter.
The registration thresholds work on a rolling 12 months basis, not necessarily a quarter, financial year or tax year. Unregistered businesses need to look at their turnover at the end of each month, and if for the last 12 months (or from date of starting to trade if less than 12 months) it is more than £85,000 the registration must be effected from the second successive month.
Turnover 12 months 1 February to 31 January – £55,000
Turnover 12 months 1 March to 28 February – £58,000
Turnover 12 months 1 April to 31 March – £69,000
Turnover 12 months 1 May to 30 April – £86,000
The registration threshold has been breached at 30 April. Registration must be effected from 1 June. From 1 June VAT must be charged on all invoices raised.
All new VAT registration applications must be made online. The paper form VAT1 has been abolished.
Is it worth registering for VAT voluntarily?
A frequent question is whether its worth registering for VAT voluntarily if you are under the VAT threshold?
Generally this depends on your customer profile and the nature of your supplies:
- standard rated and mainly consumers (B2C) – delay registering as long as possible: your customers can’t recover VAT so its a real cost, either explicitly to them or born by you on your turnover
- zero rated and mainly consumers (B2C) – probably worth registering ASAP for the benefit of input tax deduction
- mainly business customers (B2B) – probably worth registering ASAP regardless of whether supplies are zero rated or standard rated for the benefit of input tax deduction. Some businesses, eg banks, NHS, education, may not be able to recover VAT but generally they are used to seeing it charged to them and factor the cost of irrecoverable VAT into their margins – however if you have a number of small clients in this sector, it may be worth thinking about this in more detail
- exempt supplies – you probably can’t register
If you trade abroad you may need to take specialist advice as rules differ according to whether you are supplying goods or services, to consumers or businesses, and EU or non EU.
Claiming VAT on assets at registration
When you register for VAT you can go back and claim VAT input tax as follows:
- 4 years for goods you still have, or that were used to make other goods you still have – this includes both (a) stock purchased and in hand and (b) assets such as fixtures and equipment. But you can’t claim for stock already sold or assets scrapped
- 6 months for services
NB there is sometimes confusion around assets and services. Building materials you bought would be an asset and subject to 4 years recovery, materials a builder supplied as part of a construction project would be part of a service and subject to 6 months recovery. The same principle could apply elsewhere, eg software, design.
Basic Vat Accounting or Flat Rate Scheme
There are two main ways to deal with your vat.
First there is the traditional basic vat accounting method. Under this method vat is accounted for at 20% on all sales invoices, and claimed back on all relevant expenses.
Example for a contractor/PSC:
Supposing your weekly invoice is £1,000 to your agency. You are registered for VAT so you invoice them £1,000 net + £200 VAT = £1,200.
If your invoice is the same each week of the quarter then you will have collected VAT of £2,600 (i.e. £200 x 13) and this is due to be paid to HMRC no later than 30 days after the quarter end, via an online VAT return.
When paying HMRC you can deduct VAT incurred on expenses. EG if your expenses were £2,400 including VAT (equates to £2,000 plus £400 VAT) then you deduct the £400 and pay HMRC £2,200 (£2,600 less £400).
In terms of Corporation Tax, the company’s taxable income for the quarter is £13,000 and its expenses £2,000 – i.e. excluding the VAT element.
The alternative is the Flat Rate Scheme (FRS). If your vat exclusive turnover is less than £150,000 then you can use this scheme. Vat is still charged at 20% on invoices, but you pay a lower percentage of the sales income to HMRC and claim no vat back on expenses.
The main flat rate percentages which may apply are:
- Any other activity not listed elsewhere – 12.00%
- Business services not listed elsewhere – 12.00%
- Computer repair services – 10.50%
- Financial services – 13.50%
- Management consultancy – 14.00%
- Computer and IT consultancy or data processing – 14.50%
Businesses are entitled to a 1% reduction in these rates for their first year of operation.
These amounts apply to gross income. The normal 20% is applied to net income. On a like for like basis 20% on net income equates to 16.67%
From April 2017 a new 16.5% applies for business which are deemed “low cost traders”, seemingly defined as purchases of goods for business use – not equipment or services – of less than £1,000 a year. The clear intention is to move most PSCs and other labour only businesses out of the FRS as its considered “abusive”. The 16.5% rate negates almost all the benefit of flat rate scheme. See Low Cost Traders and Flat Rate
You can join the Flat Rate Scheme if you anticipate vat exclusive turnover of less than £150,000 in the next year, but must leave the scheme if your vat inclusive income exceeds £230,000; businesses on Flat Rate must carry out an annual check of their turnover against this limit. Slightly different rules apply if you have a mixture of vatable and non vatable income, check with us for details.
If you are unsure what rate applies to your business it is suggested that you contact HMRC National Advice Service on 0845 010 9000.
Supposing your weekly invoice is £1,000 to your agency. You are registered for VAT so you invoice them £1,000 net + £200 VAT = £1,200.
Your flat rate percentage is 14%
If your invoice is the same each week of the quarter then you will have collected VAT of £2,600 (i.e. £200 x 13). Your gross income during the quarter is £15,600.
At the end of the quarter you pay HMRC £15,600 x 14% = £2,184, with no deduction for expenses (unless you have capital expenditure over £2,000 including vat, in which case the vat on these items an be deducted in addition).
In terms of Corporation Tax, the company’s taxable income for the quarter is £13,416, i.e. gross income less vat. Expenses are claimed in the accounts on a gross basis as normal.
Be aware that flat rate turnover includes some items not normally subject to vat, eg rents = this is normally more of a issue for partnerships and sole traders than small companies, but anyone joining FRS should be aware of the risks if they have mixed income.
Here is a worked example:
Low Cost Traders and VAT Flat Rate
From April 2017 the Flat Rate Scheme is restricted for “low cost traders”.
Under the new rules, businesses that fall into this definition will be obliged to apply a FRS rate of 16.5% instead of their normal sector rate, and many businesses, in particular contractors/PSCs, will no longer find it economical to use.
For a business to be able to continue using their normal trade sector FRS they will be required to evidence that expenditure on “goods” is a) at least 2% of its turnover, and b) at least £1,000 per year, these calculations being performed for each return (with £1,000 pro rated). This means that, at the end of every period, before the FRS percentage can be determined, you must work out whether the expenditure on goods has been at least 2% of the VAT inclusive invoiced sales in that period, and if so, that the expenditure on goods is at least £250 (£1,000 /4). If both tests cannot be satisfied, the 16.5% rate must be used for that period.
By “goods” this means tangible purchases such as materials and other items that are resold to clients/customers, or actually used up by the business. The following cannot be treated as goods :
- Rent and other establishment costs
- Capital items e.g. computer and office equipment
- Software costs
- Motor/travelling/subsistence costs
- Sub contractor costs
Stationery costs can be treated as goods, as can non capital computer peripherals, but only insofar as they are either sold on for a profit, or actually used by the business. HMRC will be on the look out for artificial purchasing arrangements, for example businesses purchasing excessive amounts of stationery just for the purpose of inflating the cost of goods. Goods cannot be given away, donated to charity, or retained for personal use.
Standard Rated, Zero Rated and Exempt Supplies
These are the three main types of vat liability attaching to goods and services.
- Standard rated – means the goods or services attract standard VAT (currently 20%)
- Zero rated – means goods and services are charged at 0% VAT. This means there is no VAT due on the supply, but the supply counts as VATable turnover so the business can VAT register and recover Input Tax.
- Exempt – this means the supplies are outside the scope of VAT – no VAT is chargeable on them, but equally they don’t count as VATable turnover for recovering Input Tax.
There are also reduced VAT rates (currently 5%) on certain supplies, eg of domestic fuel and renovation of empty houses.
HMRC have a guide on VAT rates and sectors: http://www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm
Output Tax and Input Tax
You’ll hear these terms a lot.
Output Tax is what you charge to others on your sales when VAT registered, be they supplies to businesses or consumers. Output Tax may be explicit, eg if you charge a customer £1,000+vat, or may be hidden, eg if you own a shop and retail goods with VAT inclusive prices.
Input Tax is VAT charged to you by your suppliers. If you are VAT registered and use standard VAT then you offset this against Output Tax on your quarterly return. If Input Tax cannot be recovered for any reason, eg purchase of cars, or if you are not VAT registered, then it is “sticky Input Tax”
Return cycles, payment and penalties
VAT returns and payments are due on a quarterly basis, and HMRC allow 1 month and 1 week from the quarter end date to file and pay. There is an onerous penalty regime for late VAT returns and payments, so we advise clients to stay on top of VAT matters at all times.
Online filing requirements
It is now compulsory for all VAT registered businesses to file VAT returns online, and from April 2017 under Making Tax Digital this must be via software, either an accounts package, eg FreeAgent, or Bridging Software
VAT interaction with other EC states
Businesses that sell their services to customers in other EC states are required to file a EC Sales list. If you believe your business falls into this category, and you need guidance on this, please request our guidance notes covering this.
The above will change depending on the terms of Brexit.
Other VAT content
HMRC publish a number of VAT guides on the GOV.UK website. See the full list
There are other VAT news stories and comment on our site: see them all here
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- MTD for VAT – exemptions and deferrals 07/03/2019
- No deal Brexit: VAT rules on low value goods 04/03/2019
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- VAT on digital services 06/02/2019
- New VAT MOSS exemption from 1 January 2019 12/12/2018
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- VAT MOSS under a no-deal Brexit 20/11/2018
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- VAT vs. Brexit 25/09/2018
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- Update on option to tax 09/07/2018
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- HMRC changes its digital tax priorities 22/05/2018
- Option to tax and recovery of input tax 15/05/2018
- VAT registration threshold – significant changes ahead 12/04/2018
- VAT evasion clampdown 15/12/2017
- Brexit customs regime takes shape 12/12/2017
- Making Tax Digital another step nearer 08/12/2017
- Budget: VAT roundup 01/12/2017
- VAT on e-commerce transactions 20/11/2017
- Business Splitting – A Surprising VAT Tribunal Result 18/11/2017
- Navigating the maze of online selling – VAT on distance sales 26/10/2017
- Business-splitting to avoid VAT: HMRC loses the latest round 27/07/2017
- VAT partial exemption 17/05/2017
- VAT thresholds – and other changes 28/03/2017
- Spring Budget 2017 – First Impressions 08/03/2017
- HMRC clarify rules on claiming pre-trading VAT inputs 26/01/2017
- Major changes to Flat Rate (FRS) VAT 16/01/2017
- Autumn Statement: Changes to the VAT flat rate scheme 08/12/2016
- VAT flat rate scheme: revised HMRC guidance 09/06/2016
- Changes to VAT treatment for prompt payment discounts 06/08/2015
- Reclaiming VAT input tax prior to registration 23/07/2015
- VAT – understanding the flat rate scheme 11/06/2015
- VAT issues update 29/03/2015
- VAT: partial exemption method using floor space 10/02/2015
- VAT: businesses supplying digital services to private consumers 05/02/2015
- MOSS comes in from 1 January 2015 – business to consumer supplies in EU 11/12/2014
- Could the VAT treatment of financial services be significantly widened? 24/11/2014
- VAT changes around the EU 25/10/2014
- Do I need a receipt? 13/10/2014
- Transfer of a going concern – HMRC policy change 10/10/2014
- Guide to penalties – HMRC and Companies House 24/09/2014
- A challenge to filing VAT online 30/08/2014
- Two EU countries announce rises in VAT rates 23/08/2014
- HMRC Flat rate VAT business category test case 21/08/2014
- VAT notices updated 23/07/2014
- Overpaid VAT – is interest due? 24/06/2014
- Budget 2014 Changes to the VAT registration threshold and other business-related VAT matters. 24/03/2014
- Our VAT for PSCs guidance has been updated and expanded 17/03/2014
- February VAT update 21/02/2014
- VAT update 15/02/2014
- Autumn Statement, and VAT / Indirect Taxes 15/01/2014
- VAT update 25/11/2013
- Zero-rating for indirect exports 12/10/2013
- Understanding VAT 05/10/2013
- Recent changes to VAT 30/09/2013
- Update to HMRC Advisory Mileage Rates 10/09/2013
- Ten VAT notices have been updated 03/08/2013
- Complex cross-border transactions 28/07/2013
- VAT: single or multiple supplies 25/07/2013
- Transfer of a going concern 04/06/2013
- A summary of the latest changes to VAT across Europe 30/05/2013
- A summary of the latest changes to VAT and other indirect taxes. 12/03/2013
- Contributed: VAT and the transfer of a going concern 10/01/2013
- HMRC updated residence and non residence guidance 08/01/2013
- Contributed: Significant changes to NETPs 18/12/2012
- Contributed: European VAT update 11/12/2012
- Contributed: VAT Changes from 1 October 2012 28/09/2012
- Q? Should I be VAT registered 17/08/2012
- Contributed: VAT – face value vouchers 02/08/2012
- Contributed: European VAT update 31/07/2012
- VAT online 01/04/2012
- VAT and business separation 20/03/2012
- VAT round up – A summary of changes to VAT in both the UK and around Europe. 15/03/2012
- Filing VAT Returns Online 24/11/2011
- VAT online 08/08/2011
- HMRC announces VAT Initiative Campaign 27/07/2011
- Flat Rate VAT Scheme and Fixed Assets 23/05/2011
- Hoteliers VAT reclaim on deposits for cancellations 03/05/2011
- VAT Rise – practicalities 30/11/2010
- VAT & Overseas Clients 17/11/2010
- VAT Flat Rate Scheme and Bad Debts 01/09/2010
- June 2010, "emergency’ budget 22/06/2010
- Compulsory Online VAT and PAYE from April 2010 01/03/2010
- New VAT flat rates from 1 January 2010 08/01/2010
- VAT on intra EC services – new rules 08/01/2010
- VAT from 1 January 2010 10/12/2009
- Reminder: Compulsory online VAT returns 02/10/2009
- EC Sales List for Services 21/09/2009
- Flat Rate Trap 02/04/2009
- Online vat returns 26/01/2009
- HMRC – VAT: Partial Exemption – adjustments when house builders let their dwellings 30/09/2008
- VAT – Correction of Errors 28/03/2008
- Lennartz accounting – VAT and private use 29/11/2007
- VAT Invoice numbering 09/11/2007
- VAT Flat Rate Scheme 29/10/2007
- VAT Flat Rate Scheme 20/08/2007