The current threshold for mandatory registration if £90,000. The threshold relates to turnover (sales) rather than net profit. It is calculated on a rolling 12 month basis rather than simply looking at the last set of accounts which could give a different result. Once the threshold is reached you only have 30 days to inform HM Revenue & Customs. As an example say your sales reach £92,000 in February, following the end of the month you have 30 days to register with the obligation to start collecting VAT taking effect from April 1.
Something often missed when calculating sales for mandatory registration is the effect of purchasing services from abroad. For VAT purposes, the valve of the Supply is added to turnover. So a business with £82,000 in rolling sales which also purchased services worth £ 10,000 from Germany would be liable to register for VAT.
Suppose it wasn’t picked up on the rolling basis but when preparing the end of year accounts you spot it. The requirement to notify still stands 30 days following the end of the month in which the requirement arose. You would need to notify HM Revenue & Customs of the fact and worse yet, account for VAT with effect from the date VAT should have been charged. If your clients are also VAT registered, and happy to accept a revised invoice to show the VAT, then it would only be interest and penalties to really worry about. But suppose your customers are not in a position to reclaim VAT. They would be very unlikely to accept a revised invoice. In this case you would suffered the VAT yourself. Essentially treating the amount received as including VAT and then pay this over to HM Revenue & Customs. As an example if you made a sale of £800 but later had to account for VAT then £133.33 would be paid over to HM Revenue & Customs and your actual sale would be reduced to £666.67.
Understandably many businesses will not want to register for VAT. The added compliance can be time consuming but the biggest factor will be where customers cannot reclaim the VAT, immediately the business will either become more expensive and less competitive or will have to take some or all of the hit themselves if there is little room to increase prices. As a result some have tried to avoid registering. If the arrangements fail the requirement to register could still exist and the liability of VAT may have continued to accrue since the initial date at which registration was mandatory. So what are some things to avoid?
1 - Business splitting. This essentially tries to artificially split business activity into two or more legal entities to keep each below the VAT threshold. As an example suppose a gardener had an entity for cutting grass, another for weeding and planting and a third for hedge cutting and pruning. Combined the turnover is £120,000 but each entity is only £40,000. In reality the split is likely to be artificial as the activities are too closely linked. On the other hand if the gardener had income from all gardening services of £50,000 and also worked as a delivery driver earning another £50,000, using a different legal entity, these should be recorded and reported separately and would not be seen as an artificial split.
2 - Another means some mistakenly think would avoid the requirement to register is the recording of work performed by and paid to subcontractors. This approach is a misunderstanding of the rules concerning Agents or Principles. Take the same gardening scenario as above. Say Fred has £120,000 worth of work to do but this is much more than he can or wants to do on his own. He decides to subcontract all the work out, paying 50% to the worker and retaining 50% himself. Fred continues to bill the customers and pay the subcontractors their charge. Fred may like the idea of only reporting the amount he retains as his income, £120,000 at 50% would be just £60,000, well below the VAT registration threshold. However this would not be legitimate. His turnover would need to report total amounts invoiced out. The payments to subcontractors would then be reported as an expense in his trading accounts. The income tax position would be the same.
VAT can be a complex area of tax with many hidden surprises. Obligations can easily be missed if not regularly monitored and large tax liabilities can be built up. If you would like to discuss how WB Accountant can assist you with VAT compliance please give us a call or send a message.
