One of the considerations you must make when starting a new business or growing an existing one is whether or not to register for VAT. If your annual turnover exceeds £85,000, you have hit the VAT threshold and must register. If your annual revenue is less than that, you can choose whether or not to register.
Once you’ve registered, you’ll need to charge the proper rate of VAT to your customers on your invoices, as well as file quarterly VAT reports and payments with HMRC. The situation becomes more complicated if you are not VAT registered or if you are working with a customer who is not VAT registered.
In this post, we’ll go through how to charge and submit VAT in a variety of circumstances, as well as the procedures you’ll need to take to become VAT-registered. We also go through the fines HMRC may levy if you make a mistake during the procedure. We recommend seeking expert assistance if you are unsure how to proceed since certain parts of VAT might be complicated.
Why should you register for VAT?
Is it worthwhile to register for VAT if you don’t have to? There are several advantages for a developing company. For starters, it offers your clients and suppliers the appearance that you are a larger, more established company, which might help you obtain contracts or negotiate better terms with suppliers.
It also means that you may claim any VAT that providers charge you – and they will charge you whether or not you are registered.
Consider the additional administration and accounting required to guarantee that VAT accounting is done completely and precisely, as well as the fact that you must make monthly payments to HMRC on schedule regardless of your cash flow situation.
By registering for VAT, you are basically imposing a price increase on your clients. Despite the fact that businesses may recover the VAT, the psychological impact of the price increase could be detrimental to consumer relationships.
How can I get my VAT number?
You can apply for VAT registration on the HMRC website if you wish to do so. You’ll be given a VAT number to use on your invoices and HMRC reports.
Your decision to register might be based on your previous or projected revenue. If you have achieved the £85,000 barrier, you must register within 30 days of doing so.
If you believe that you will achieve the threshold during the following 12 months, you can register at any time before you reach the mark, but you must do so within 30 days of reaching the mark.
Your Effective Date of Registration (EDR) will be determined by HMRC based on whether you apply for registration right before or after the deadline.
It’s crucial to note that the £85,000 number must represent taxable turnover, which is defined as the provision of VAT-rated products or services. Any non-VAT-rated products or services must be excluded from the calculation.
Schemes for VAT
When you register for VAT, you can choose between three different schemes, each with its own set of reporting and payment requirements:
- You submit your VAT returns and payments to HMRC four times a year under the yearly accounting plan.
- The yearly accounting system allows you to:
- Make VAT payments in advance to your VAT bill based on your most recent return (or an estimate if you’re new to VAT).
- once a year, file a VAT return
The difference between your sales invoices and purchase invoices is the amount of VAT you pay HMRC under the cash accounting scheme. Even if the bills have not been paid, you must submit these statistics to HMRC and pay any money owed to them.
With the cash accounting scheme you:
pay VAT on your sales when your customers pay you
reclaim VAT on your purchases when you have paid your supplier
The flat rate scheme is for businesses expected to reach a turnover of less than £150,000 in the next 12 months. The amount of VAT a business pays or claims back from HMRC is usually the difference between the VAT charged to your customers and the VAT you pay on your own purchases.
With the flat rate scheme:
you pay a fixed rate of VAT to HMRC
you keep the difference between what you charge your customers and pay to HMRC
you cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000
VAT is levied.
If the goods or service is VAT rated, you must apply the appropriate rate of VAT on every invoice you submit once you’ve registered and received your VAT number.
However, even if the goods or service is VAT-rated, you cannot charge VAT on your invoices until you register. If you do, HMRC will issue you a penalty fee.
In the same way, if you are registered but do not charge VAT when it is due, you will be penalized.
It doesn’t matter if your customer isn’t VAT registered when you send out invoices. VAT must still be collected and paid to HMRC. Your unregistered clients will be charged the full cost, including VAT, and will not be eligible for any discounts.
When you make your quarterly report to HMRC, you record all the VAT you have charged as an output tax and pay the amount in full.
Having to pay VAT
When you acquire VAT-rated supplies from a VAT-registered business, you’ll get a VAT invoice containing the supplier’s VAT number and the amount of VAT included in the total invoice. You must pay the total amount due to the provider.
If you are VAT registered, you can get a refund from HMRC for the VAT you paid. You seek a refund by recording this as input tax on your VAT return.
However, if you buy supplies from a non-registered company, you should not receive a VAT invoice and you must not pay any VAT shown incorrectly on the invoice, even if the items are VAT-rated. If you do pay VAT in error, you will incur a penalty charge from HMRC.
Penalties for mistakes in VAT registration and billing
HMRC has a variety of registration and charging penalties. You must be informed of the important registration dates in order to comply with their criteria. Your Effective Date of Registration (EDR) is determined by whether you apply to register before or after crossing the threshold. If you do not apply on time, you may face fines for late registration.
If you registered Penalty rate
Not more than 9 months late 5 percent
More than 9 months but not more than 18 months late 10 percent
More than 18 months late 15 percent
There is a minimum penalty of £50.
VAT is also penalized if it is charged too early. You cannot legally charge VAT to clients unless you have registered for VAT. The penalty for charging VAT on an invoice without being registered is up to 100% of the VAT on the invoice. There’s also a ten percent penalty for charging VAT before the deadline. Even if you notify HMRC that you made a mistake, you will face this penalty.
Support from CBM Accounting
This is a quick rundown of the VAT registration and management rules. Our team of experienced tax accountants would be happy to assist you if you want expert guidance on any area of VAT or confirmation that you are complying with HMRC’s VAT laws.