VAT registration

Lots of businesses stop their turnover at just under £85,000 to avoid registering for VAT. In fact, 55% of trading UK companies’ turnovers are below that threshold. What if you find yourself trading above that figure, though?

Here at Modina, we don’t want you to get caught out. This article covers everything you need to know about VAT thresholds, and what to do if you find yourself needing to register for the tax.

VAT registration – Purchases before Registration

You’re allowed to claim VAT on certain purchases made before you registered, but there are time limits. From the date of registration, these limits are:

  • 4 years for goods you still have/goods that were used in the making of goods you still have
  • 6 months for services.

Doing this can help make the first return a little less painful, and it will sometimes result in a refund.

VAT registration – I’ve gone over the VAT threshold. What can I do?

How strongly HMRC reacts to this all depends. If you went over the threshold in the last 30 days, it’s not an issue. You have an additional 30 days from the date your turnover exceeded the threshold to let HMRC know, and register for VAT.

However, it’s more common for people not to realise they’re over the threshold until well into preparing the year-end accounts. Unfortunately, this sometimes lands them in hot water, as time-wise this can be up to 9 months after the year end, and 21 months after the threshold was initially exceeded.

The idea of registering from the current date rather than the true date the threshold was crossed can be attractive, but if HMRC realise this is the case, you could be in line for hefty penalties.

It’s better to be honest and upfront by paying VAT due on all sales from the date of registration. You may still incur a penalty, but it’s likely to be lowered if you register for VAT voluntarily. Plus, you’ll be given the opportunity to send in your VAT figures for the missing periods.

Registering voluntarily also means HMRC has a true measure of your VAT numbers: if they think you’ve gone over the threshold without registering, they’ll estimate your VAT. More often than not, this leads to a big overestimation of VAT, a large sum of money which you’ll still have to pay.

VAT registration – Penalties 

Penalties for late VAT registration are covered by the set of ‘failure to notify’ penalties set by the government. These vary in the level of fine (based on turnover) you actually pay – has the penalty been incurred because of accidental, deliberate, or deliberate and concealed errors? They’re also dependent on timeframe, as shown below:

  • If you notify HMRC voluntarily within 12 months of the date you should have registered, and you can prove it was an accidental error, the penalty percentage shouldn’t exceed 30% of the VAT payable. In some cases, it can even be 0%.
  • Once you pass 12 months, however, the penalty can increase to 10-30%.
  • And after 12 months, if HMRC deem your ‘error’ to be deliberately concealed, you may have to pay 50-100% of the VAT owed as a penalty charge.

Of course, there are reasonable grounds on which to claim a legitimate excuse, but lack of knowledge or expecting someone else to manage your finances for you won’t count in HMRC’s eyes.

The best way to avoid this is to be upfront and honest. Then, HMRC will be less likely to see your mistake as a deliberately concealed error.

In short – keep on top of your turnover, register at the right time, and don’t make excuses that will inevitably lead to penalties.

VAT registration – Late Submission/Late Payment

There are penalties for late submission or payment. These depend on your turnover, and how many previous late returns you’ve had over the past 12 months.

Late submission/payment penalties are called surcharges and are calculated based on the percentage of VAT due that quarter. HMRC need your VAT figures for each quarter or they’ll make an estimate – the latter will cost you far more.

However, there are thresholds placed on your turnover which determine the level of leniency you’ll receive in terms of defaulting. These are as follows:

  • If your turnover is below £150,000, there’ll be no surcharges until the third late return, when it’s 2%. If your VAT is very low, there may be nothing to pay until 5th late return.
  • If your turnover is above £150,000, surcharges kick in on your 2nd default.

Note that the maximum surcharge is 15% of the VAT due for that quarter. Avoid submitting the return on time but failing to pay the VAT – HMRC charge daily interest on the amount due until it’s paid.

VAT registration – Temporarily over the threshold 

If you find yourself temporarily over the threshold, you may be able to ask HMRC for a registration exception.

This must be done within 30 days of the date you went over the threshold. You’ll need to provide evidence to show you will not be exceeding the threshold in the next 12 months. HMRC make decision on whether you get an exception or not.

VAT registration – De-registration

First, know the threshold to deregister: it’s £83,000, not £85,000 like the registration threshold.

You can consider de-registering if:

  • Your business is ceasing trading,
  • Turnover has dropped below the threshold, or,
  • You’re confident turnover will remain below the threshold over the next 12-month period.

If you’re de-registering on the basis that your turnover is decreasing and will continue to do so, you’ll need to provide evidence to that effect. HMRC will need to see proof of a change in circumstances that could lead to reduced sales.

Once you de-register, you’ll still have to complete a final VAT return. This will be applicable from the start of your current VAT period to the de-registration date.

It’ll be due a month and 7 days after your de-registration date – be aware of this, as it will likely be different to your usual VAT deadline.

VAT registration – Tips 

Here at Modina, we recommend putting VAT aside monthly. You can’t spend what isn’t yours, though it can sometimes be confusing calculating what percentage of the money available to you actually belongs to you.

Stay up to date with your business finances, and you’ll find meeting VAT deadlines a whole lot simpler.

Got questions regarding VAT and registration dates? Give the Modina team a call on 020 7183 8241 or drop us an email at info@modina.co.uk. We’d be more than happy to help.

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