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VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, explains some advantages and disadvantages of VAT registration for service businessesVAT Solutions Ltd recently heard from a client who had started a new accountancy practice, and although he was still below the VAT registration threshold, he wondered if it would be beneficial for him to register for VAT.

’Pros’ and ‘cons’

As with most things, there are pros and cons in registering for VAT. On the down side, you have the administrative burden of completing registration forms and quarterly VAT returns, although most modern computer accounting packages will do the work for you anyway. You will also have to charge VAT to your customers. If they are mainly VAT registered themselves, it will have minor cash flow effect, but that aside, should cause no problems. On the other hand, if your clients are not VAT registered, or are private individuals, then overnight you will make yourself 17.5% more expensive, and be commercially disadvantaged as a result.

On the plus side, you will be able to recover the VAT on your purchases, and not just those from the date you register for VAT. VAT can also be recovered on goods or assets purchased three years prior to registering for VAT, provided they are still on hand at the time of registration, and the normal evidence for the deduction of input VAT is retained (i.e. the purchase invoice). You cannot recover VAT on the items that you no longer have at the time of VAT registration because they have been sold or used up.

VAT on services

With services, the rules are slightly different. VAT on services can only be recovered on services received six months prior to VAT registration. The services have to be used for business purposes, and you must also retain the purchase invoice(s).

You are supposed to claim back any pre-registration VAT on your first VAT return. However, HMRC may allow the claim to be made on a later return, up to three years after the date the first return was due. You could, therefore, reclaim the VAT on goods or assets six years after they were acquired.

A corporate body can recover VAT incurred before incorporation on its first VAT return providing the person to whom the supply was made, or who paid for the supply, became a member (shareholder), officer or employee of the corporate body and was reimbursed for the whole cost of the goods or services and they were acquired for the purposes of the business.

In addition, there is the perceived ‘street cred’ of being VAT registered. If your customers are mainly large companies, and they see you are not VAT registered, they may think your business is not large enough to service them properly. With a VAT number, however, the may assume you are bigger than you are, and take your business more seriously.

On a practical level, VAT registration can take up to two months to complete due to backlogs at HMRC, even though the Taxpayers Charter says are supposed to do it in 15 working days.

No VAT registration number?

So, what happens if you have applied for VAT registration from a current date, and you do not have a VAT number yet? Without a VAT number you cannot issue VAT invoices. HMRC will advise you to charge a VAT-inclusive price on your ‘invoice’ and add a statement that the price includes VAT, and that you are VAT registered but have not yet received your VAT number. Once you get the number, you should issue a VAT invoice within 30 days. Be prepared, however, for the fact some customers may query this treatment, and be reluctant to pay until they get a proper VAT invoice.

September 2005

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc