When do I need to register for VAT?

Clients often come to me after their accountant told them that VAT is calculated from the beginning to the end of the company's financial year...

Of course, this is not true! The VAT 'accounting year' is 'rolling', and it turned out that the client should have been VAT registered for several months already, and could face financial penalties for failing to register for VAT.

When a company becomes VAT registered - the threshold amount

In this article, I will therefore explain when we need to register for VAT. 'Voluntary' VAT registration is a separate issue. In certain situations, this can have advantages – which I will write about in another article.

It all starts with the so-called taxable turnover which is income subject to VAT. Such turnover above £90,000 means the necessity to register the company for VAT purposes. Previously, before April 2024, this amount was £85,000.

Turnover above £90,000 means the necessity to register the company for VAT purposes

This is an important distinction, because VAT Act 1994 defines four categories of supplies – Zero Rate VAT (0%), Reduced Rate (5%), Standard Rate (20%) and VAT-Exempt.

When calculating taxable turnover the first three groups are taken into account, and therefore also supplies subject to zero-rate VAT. However, certain services are VAT-exempt: insurance, burial and cremation, medical services...

If your business is, for example, a dental clinic, it is highly probable that most of our turnover consists of VAT-exempt services. VAT-able supplies might include, for example, the sale of cosmetics.

So, if a dentist has a turnover of £100,000, but sells products that are subject to VAT and generated £20,000 from these sales, then they will not have to register for VAT, because they did not exceed the magic figure of £90,000 in taxable turnover:

VAT-exempt services – £80,000
VAT-able product sales – £20,000

Once your income exceeds £90,000, you must register, even if it includes products or services subject to a zero VAT rate. In such cases, you will file quarterly, or you can simplify your VAT accounting (which I wrote about in a previous article).

How to check if you need to register for VAT

Remember that a business owner should check monthly whether they have exceeded £90,000 by reviewing their turnover for the past 12 months.

A business owner should check monthly whether they have exceeded £90,000 by reviewing their turnover for the past 12 months

Some accountants incorrectly advise Polish companies in the UK, stating that this threshold is reset for the entire financial year of the company.

Therefore, every month we need to perform two tests:

1. Have we exceeded £90,000 (historic test)?
2. Do we have reason to believe that we will exceed this amount within the next 30 days (future test)? -- for example, if we have a signed contract starting in the next couple of weeks that will increase our sales. In such a case, HMRC will want its share in the form of VAT.‍

What awaits a company that has not registered for VAT?

Such a company faces severe financial penalties. Fines can reach up to 100% of the VAT amount that should have been paid.

Example.

A company had revenue from sales subject to a 20% VAT rate amounting to £100,000 and failed to register for VAT on time. HMRC will calculate that £10,000 should have been subject to VAT, meaning £1,667 in VAT should have been paid from these sales. Additionally, the maximum possible penalty, up to 100%, could be added by HMRC, potentially another £1,667. In total, £3,333 will be due!

How much time do you have to register for VAT?

You have 30 days to register from the end of the month in which the £90,000 limit was exceeded. You must inform HMRC, and you will be required to charge VAT from the first day of the following month. So, if the £90,000 threshold was exceeded in March, you must notify the tax office by the end of April and will become a VAT payer from May 1st.

Example.

Przemek started his business in March 2018. Each month, he checked if his turnover in the last 12 months exceeded £90,000. This threshold was only reached in May 2018, so he was obliged to inform HMRC by the end of June and should have been VAT registered from July 1, 2018.

For my client, who has several months of overdue filings, the situation will be much more complicated. It will be necessary to review all documents previously entered into the accounting system by an incompetent accountant.

As a VAT-registered business, our client could reclaim VAT on all VAT-eligible assets purchased within the last 4 years and still used in the business. For services, VAT can be reclaimed for the past 6 months. Of course, it was worth doing this to reduce the tax burden, but the work was very time-consuming – it would have been much easier to do it at the time our client actually made the purchases.

As a VAT-registered business, you can reclaim VAT on all VAT-eligible assets purchased within the last 4 years and still used in the business. For services, you can reclaim VAT for the past 6 months.

Hopefully, HMRC will be understanding, and our client will not be fined, and the cost of sifting through the historical documents won't be too high.

The most important thing, however, is that the problem will not escalate further.