Who needs to register for VAT?

VAT

VAT registration is compulsory if your annual turnover is above the registration threshold (from 1 April 2014 this is £81,000).

If the turnover of a business exceeds the VAT exemption limit, the business must register for VAT and charge VAT on its sales. The VAT registration limit changes annually.

Registration can depend on past or future turnover. You must register for VAT with HM Revenue and Customs if your turnover for the past 12 months exceeds the annual registration limit. You must also register if you expect your turnover in the next 30 days to exceed the annual limit (which can happen with large, one-off sales, for example).

If you intend to purchase a business as a going concern, you may need to register at the date you buy the business. The VAT rules for the purchase of a business as a going concern are complex. It is worth taking advice in these circumstances. For more on taking over a business see http://www.hmrc.gov.uk/vat/start/register/takeovers.htm.

For more information on when to register for VAT, see:http://www.hmrc.gov.uk/vat/start/register/when-to-register.htm

For more information on how to register for VAT, see http://www.hmrc.gov.uk/vat/start/register/how-to-register.htm

If you operate a business where the turnover is less than the VAT registration limit you can choose to register for VAT voluntarily. For more information on voluntary registration see http://www.hmrc.gov.uk/vat/start/register/when-to-register.htm#5).

Non-VAT registered businesses are not allowed to charge VAT on the good and services they sell, and cannot reclaim any VAT on the goods and services they use.

Temporarily going over the registration limit

If your sales exceed the VAT registration threshold over the last 12 months, but this is only temporary – the result of a one-off sale perhaps – then you may ask HMRC not to be registered. This is called an exception from registration.

To qualify, your future sales need to be below the de-registration threshold. From 1 April 2014 this is £79,000. For details see HRMC’s leaflet Should I be Registered for VAT section 2.7.

Please note: If your turnover goes over the VAT limit temporarily, but you don’t notify HMRC within 30 days, you will not be able to ask for an exception. Instead you will be registered and have to apply to be de-registered. This could be very expensive as you will have to pay HMRC the VAT you should have charged on your sales.

Basic example showing how VAT works:

Better Bathrooms is a VAT registered business. It makes bathrooms. Fast Fittings buys bathrooms from Better Bathrooms and installs them.

On 20 January 2014, Fast Fittings buys a bathroom from Better Bathrooms. The cost is £2,000. As Better Bathrooms is VAT registered, it must charge 20% VAT on top of the sale price. So Better Bathrooms charges Fast Fittings £2,400 (£2,000 for the goods plus £400 in VAT). Better Bathrooms will pay the VAT of £400 charged to Fast Fittings across to HM Revenue and Customs when they complete their next VAT return.

Fast Fittings install the bathroom in Mr and Mrs Hall’s house on 27 January 2014. Fast Fittings’ charges £3,000 for the work. This includes a charge for their labour as well as for the bathroom fittings. As Fast Fittings is VAT registered it must charge 20% VAT on top of its charges. The bill to Mr and Mrs Hall will be £3,600 (£3,000 for installing the bathroom plus £600 in VAT).

Fast Fittings will need to complete a VAT return later in the year. This will include the £600 of VAT charged to Mr and Mrs Hall, but Fast Fittings will be able to deduct the £400 in VAT paid to Better Bathrooms. They will only pay £200 of the VAT collected from the Halls to HMRC; the other £400 was paid to Better Bathrooms, who will in turn have paid that VAT to HMRC.

Overall, neither Fast Fittings nor Better Bathrooms have had to bear the cost of any VAT. It is Mr and Mrs Hall who have had to bear the cost of the VAT (£600). Better Bathrooms and Fast Fittings have just collected it on behalf of HM Revenue & Customs. It is important to remember that VAT is a tax on consumers which is collected by businesses on behalf of HMRC. It is not your money and the penalties for not operating VAT correctly can be severe.

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