VAT is something that we all have to deal with, whether we’re buying a product or service, or providing a product or service.
However, if you’re a business owner, it’s important to have a firm understanding of VAT, including the VAT process, how to register for VAT, and VAT exemptions. It’s a legal requirement that can have repercussions if not conducted in the correct manner.
If you’re looking to learn more about VAT, you’re in the right place. Keep reading to learn more about VAT, including when you’re required to register for VAT and how to become VAT registered.
What is VAT?
VAT is a form of tax on goods and services, standing for Value-Added Tax. This form of tax is assessed at each stage of the production process and doesn’t follow a permanent rate. VAT depends on the value of the service/ product during the process, from production to distribution and ultimately the end sale.
VAT is a consumption tax that is applied to goods and services, alongside other taxable supplies. It is paid by the consumer rather than the business and isn’t regarded as a tax on individual businesses. Regardless, businesses still pay VAT to HMRC – although this is covered by the customer’s purchase.
This means that VAT is an indirect tax. It is the responsibility of the business to report the details of VAT to HMRC. If the business doesn’t do so, then it may lead to investigations and penalties.
Most businesses follow very similar VAT processes, but charities tend to have slightly different rules and regulations.
The key taxable areas for most businesses include:
Any commission earned
Business assets sold
Staff sales (e.g meals for staff)
Exchanges (e.g new products for old products)
Loan or hire of goods
Business goods used for personal use
When Do I Register for VAT?
It’s important that you notify HMRC that you need to register as soon as you expect to exceed the VAT threshold – or when you notice that you’ve exceeded the VAT threshold.
Be sure to let HMRC know of your requirement to register within 30 days of you exceeding the VAT threshold (£85,000). For example, if you exceeded the VAT threshold historically, then you need to register one month and a day after you exceed £85,000.
If you expect that your taxable turnover in the UK will exceed £85,000 in the next 30 day period, then you need to notify HMRC within 30 days. This means that you’ll be VAT registered from the date that you made the prediction.
For example, if you take an order of £86,000 on the 1st January that’s expected to be delivered in the next two weeks, you should let HMRC know by the 14th January – but you’ll be VAT registered from the 1st January.
If you don’t register with HMRC for VAT or you register late, then you could face investigation and penalties. Your VAT will be back-dated with HMRC, meaning that you’ll owe HMRC the VAT on your income within the unregistered period.
How to Become VAT Registered
Registering for VAT is a straightforward process, and can be completed online by most businesses. Firstly, you’ll create a VAT account online (aka a Government/ Gov Gateway account). This is where you’ll submit your VAT returns to HMRC.
However, some businesses may be required to register by post using a VAT1 form. When registering your VAT, you’ll be required to include information about your business activities, your turnover, as well as your bank details. Upon completing your VAT registration, you’ll receive a VAT registration certificate within 30 days on your online VAT account.
Be sure to bear in mind your registration date, as this will be your effective date of registration – VAT registered businesses will be required to pay HMRC the VAT that is due from the effective date of registration.
Claiming VAT Back
Once you are VAT registered, there may be opportunities to claim back VAT on certain eligible purchases when completing your VAT return.
You aren’t able to receive VAT on the costs of any activities that aren’t business-related, as well as VAT-exempt activities.
When completing your first VAT return, you can claim VAT back on some costs that were incurred before being VAT registered.
