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Why Register
For normal businesses billing normal business clients it is almost always a good idea to be registered for VAT because your customers don’t care about being charged VAT, and you get to recover VAT on your business costs, which would otherwise be your expense, so you make more overall profit.
Once your sales reach £90,000 in the previous 12 months, you MUST register, but Voluntary Registration is often an advantage.
Although you anticipate your life becomes a nightmare once registered, this is mostly untrue. Filing quarterly info might feel a pain, but handing over all your bank statements, invoices, expenses, to your attentive accountants every three months, is only the data you have to send them anyway to do your annual accounts, it's not actually loads of extra work.
Similarly you only have amend your excel template once for billing your devoted customers, so is that a big deal? And now that interest on bank deposits has been reinvented, you earn interest on the tax money you have collected in advance of handing it over to HMG. Thanks to the invention of Cloud software you can raise invoices out of the software in real time, and your accountants can track everything too - simples. And no it shouldn't cost you any more for your accountancy services.
Question -is vat charged on….? | Answer |
|
|
Biscuits | Yes – but how do you know? Jaffa cakes. |
Cakes | no |
Books | No |
Taxis | Yep – if vendor gives a vat receipt |
Parking | Vatable, but get receipt |
Entertaining | Who cares-you can’t get it back |
Food – raw | No |
Takeaway COLD food | No |
Takeaway HOT food | Always if café regd. |
Sit-in COLD/HOT food, even in a caff garden, designated pavement area outside café, even if it’s jolly freezing | Always if regd. |
Pizzas, sausage rolls | ALWAYS, because usually sold hot, even if actually sold cold. PS Greggs? noidea... |
Meals | Yep – if vendor gives a vat receipt |
Hotels | Yes – but only in UK. Overseas is separate rules |
Fuel – petrol/diesel | Yes |
Electricity | Look at bill 5 or 20% ? |
Gas – if domestic lower rate applies | Yes but…. |
Heating oil | Yes but…. |
Legal fees | Yes, unless exempt items – they have some really funny exemptions |
Newspapers | No |
Postage, parcels | No, unless you’re actually using a courier |
Couriers | Yes, but maybe not if going outside UK |
Software | Yes |
Stationery – paper, envelopes, pads, pens | Yep |
Telephone | Yes |
Mobile phone top-up cards | NO |
Air/Train travel | No |
Building extensions | Yes |
Separate new building | 0-rated |
VAT registration pitfalls
In the UK it takes for ever to get a VAT number, especially if you try and hurry them up. So resist ringing/chasing until you are over eight weeks of teeedious waiting. The timetable runs as follows:-
You must apply online, and you get an immediate case reference
within two weeks you get an (unnecessary) letter from PRRT Cardiff saying nothing
within another 4-6 weeks you get a standard letter asking for all the stuff you cannot enter about your interesting business when previously doing the online application, but knew they would need anyway.
THEN this reply will mostly go to Deansgate Wolverhampton via PRRT Cardiff who stick it in a massive pile
it is pointless chasing until at least month has elapsed AFTER you replied.
then the real stress starts…..
Officially the explanation is to reduce fraud i.e. we are too mean to put more staff on the job, and have absolutely no idea how to cut down on VAT fraud so we will flap about creating mayhem just in case it has some effect.
VAT - EFFECTIVE REGISTRATION DATE
Basics
Dishy Economic Solutions , a longstanding client of ours, has contacted us as he believes his business may have breached the VAT registration threshold and is therefore required to register for VAT.
Dishy Economic Solutions is a small toy shop that sells a variety of children’s toys, video games and some confectionary. Business has been steady throughout 2023 but in the build up to Christmas he began to stock slime which has been an instant bestseller. He did not anticipate slime being so popular and he believes this may have tipped him over the VAT registration threshold.
When should Dishy Economic Solutions register for VAT?
Dishy Economic Solutions must register for VAT when its taxable turnover exceeds the VAT registration threshold, which is currently set at £85,000. However, a business can register for VAT voluntarily if its taxable turnover is below the threshold.
The business breached the VAT registration threshold on 08 December 2023 and must notify HMRC within 30 days following the end of the month the VAT registration threshold was breached. As the VAT registration threshold was breached on 08 December 2023, the business must notify HMRC by 30/Jan/2024. The VAT registration will be effective 01 February 2024 unless an earlier date is chosen.
The business was not expecting such a surge in taxable turnover and as such was not anticipating its taxable turnover to exceed the VAT registration threshold for some time. However, if at any point the business had expected the taxable turnover in the next 30 days alone to exceed the threshold it would have been required to register for VAT within 30 days of that expectation arising.
When should Dishy Economic Solutions start charging VAT?
The business must charge VAT from the effective VAT registration date – this is selected during the application process. If the effective date of VAT registration has been backdated, then VAT is declared on all sales made following the effective registration date.
Some businesses wrongly assume that they do not charge VAT until they have received their VAT registration certificate (used to be in the post). However, this can take up to 30-60 days depending on how fussy HMRCy feel, at which point they may have not charged VAT for several weeks in error. And how do you get it back?
What if Dishy Economic Solutions fails to register for VAT on time?
If the business fails to notify HMRC by 30/01/2024 HMRC may issue a penalty. Penalties for failing to VAT register on time are calculated as a percentage of the VAT due, with the percentage increasing depending on the time that has elapsed between the date from when the business should have notified and the date HMRC receives the application.
The penalty percentage is 5% if the business registered for VAT no more than 9 months late, 10% between 9 and 18 months late and 15% more than 18 months late.
If the business fails to register for VAT within the timeframes outlined above, it he will have to declare VAT on all sales made following the point the requirement to register for VAT arose. If the customer is VAT registered it may be possible to issue an invoice for the VAT on top of the sales made as the customer should be able to reclaim this VAT. However if the customer is a private individual or a business that is unable to reclaim its VAT, the VAT due will have to be absorbed by the business representing a decrease in profit for Dishy Economic Solutions. In this instance, the business will need to treat the sale price as gross and VAT is declared at 16.67% (1/6 of the money received).
Are there any special schemes that could make life easier for Dishy Economic Solutions ?
As Dishy Economic Solutions only makes retail sales it could benefit from using a retail scheme. By using a retail scheme, the business would calculate VAT at the time of preparing the VAT return rather than with each sale. There are standard schemes available and the suitability will vary based on the type of sales made and how sophisticated the till system is.
There are a number of other special schemes which the business could operate. These schemes include:
The flat rate scheme – under this scheme VAT is paid to HMRC using a fixed percentage which is typically lower than the standard rate of VAT. Under this scheme a business would still charge 20% to their customer and they would keep the difference. This amount kept is meant to act as a proxy for the VAT a business would normally reclaim on its purchases. This is because you cannot claim any VAT on purchases under the flat rate scheme (other than capital purchases). This scheme is not really appropriate for Dishy Economic Solutions as it purchases a lot of stock and also sells zero-rated children clothing which, under the flat rate scheme, would require VAT to be declared at the fixed percentage.
The second-hand margin scheme – under this scheme VAT is only declared on the margin (sales price – purchase price), rather than the full selling price. However, this is only possible if the goods were purchased VAT free. The only goods which this would apply to in the context of Dishy Economic Solutions are second hand toys purchased from consumers.
The cash accounting scheme – under this scheme the tax point shifts from the date of the invoice to the date cash is actually received by the business. As the business is retail, invoices and payment typically occur on the same date. As VAT cannot be claimed on purchases until payment has been made by the business this scheme could actually be negative from a cash flow perspective. And it creates a nightmare for the accountants keeping the books!
Annual accounting – this scheme allows one VAT return to be filed per year, rather than one quarterly. However, interim payments are required throughout the year. This reduces the administrative burden of VAT registration, but it can present cash flow problems for businesses which receive regular repayments from HMRC. We have advised businesses not to use this scheme because it actually creates more admin bureaucracy, and for the business it means in slower periods the interim payments could be higher than they would be under normal VAT accounting. And we hate doing the annual reconciliation of a vat return for a year less all the payments made, which inevitably crosses over the year end of the company too, whilst also ignoring subsequent vat payments relating to the next vat period, all whilst trawing through the 80% complete pile of assorted bank statements supplied by the client. etc.
Also bear in mind that you can't chop and change in and out of the schemes to suit yourselves, so once you're in you have to stay. Don't think you can choose the 'cheapest' when it suits you.
What does Dishy Economic Solutions have to do now it is VAT registered?
…....engage a super expensive accountant, and relaaaaax as it's all their problem.
Now the business is VAT registered it must account for VAT on all sales that are subject to VAT. The business can also reclaim VAT on purchases made in the UK. If stock is purchases from outside the UK, the VAT treatment will be different, as essentially the VAT on the imported goods gets paid as they land in UK, and Dishy Economic Solutions is VAT registered. This means that the business must charge itself VAT but it can also reclaim this VAT. The business can recover import VAT through its VAT return.
It is also possible for the business to reclaim some of the VAT incurred prior to VAT registration. VAT incurred on services in the 6 months prior to VAT registration can be claimed.
Incidentally if you're engaged in importing and/or exporting goods, life is much simpler if you're vat registered. The international documentation expects a Registration number, and the alternative of an EORI number is not a great fix.
Important
The business can also go back 4 years for goods as long as they are still on hand at the time of registration (i.e. stock that has not been sold or fittings at the premises). This is important if the company bought any expensive items prior to VAT registration e.g. Shop fittings or Till software. But did they keep the receipt?!
Dishy Economic Solutions must submit its VAT return every quarter and pay the VAT owed. The VAT return submission deadline is 1 month and 7 days following the end of the VAT period. For example, the VAT return for the period ending September 2023 is due for submission/payment by 7th November 2023.
VAT rate gyrations
Rate | From | To |
17 ½ % | for ever | 30.11.2008 |
15 % | 01.12.2008 | 31.12.2009 |
17 ½ % | 01.01.2010 | 03.01.2011 |
20 % | 04.01.2011 | next crisis |
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The standard rate of VAT was temporarily reduced to 15 per cent on 1 December 2008 (thanks bankers) and returned to 17.5 per cent on 1 January 2010 when the Chancellor realized the missiles fund was running low. On 4 January 2011 the standard rate increased to 20 per cent as the next shower realized a) they had failed to reduce the spending rate they inherited b) they dimly realized it was less contentious banging up VAT instead of the rate of Income tax.
NB!!
For any sales of standard-rated goods or services you made between 1 January 2011 and 3 January 2011 inclusive you should have charged VAT at the rate of 17.5 per cent. (yep a civil servant solution to a non-problem).
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