Enter Your E-mail

VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, explains how voluntary VAT registration can work to the trader’s advantage.

Common mistakes

We all know that registration for VAT is compulsory when the annual turnover, calculated to the end of any month, exceeds the registration threshold currently £61,000. The cumulative or rolling 12-month turnover should be carefully monitored, so that registration can be sought at the right time. However, a common mistake is either to wait until the end of a calendar quarter, or, worse still, to wait until the annual income tax return is due or the annual accounts are produced.

There is a further rule, sometimes missed, where registration is obligatory based on future turnover. This applies where a person expects that, in the next 30 days alone, his turnover will exceed the threshold. The 30-day period can start at any time, and will affect a person where a large contract is under discussion with a customer. Under this rule, registration is required imeediately, so that the large contract, for example, will be subject to VAT.

Where a person fails to notify his liability to register, he is liable to a late registration penalty. This is calculated at 5%, 10%, or 15% of the net tax due, depending on the length of time between the date of registration and the date HMRC received notification. The 5% rate applies up to 9 months, 10% up to 18 months, and 15% for a delay over 18 months. Since postal and other delays seem to occur all too frequently, a copy of the notification should always be kept, and a note made of the date on which it was submitted. A penalty can be mitigated (or even cancelled in full) if there are genuine circumstances which prevented the person from submitting the application at the correct time.

Pre-registration VAT

Regulations allow a person to reclaim input tax incurred prior to registration. Although this may be seen as a concession by HMRC, the taxpayer actually has a statutory right to such input tax, and can be very helpful to a growing business.

Where the input tax relates to goods purchased, they must have been purchased within three years of registration, obtained for the purpose of the business which is registered, and still be on hand at the date of registration. A stock account of the goods will need to be completed, and proper VAT invoices must be maintained. Excluded are goods that have been consumed before registration, such as petrol or electricity. However, it does include goods that have been incorporated into other goods, such as office improvements, computer upgrades etc.

The rules for services are slightly different, as a claim can only go back six months. Again, those services must relate to the business which is registered for VAT, and a record of such services should be prepared.

A claim for input tax under these rules must be made on the first VAT return. In practice, such a claim can be prepared at around the time the business is registered, so that the necessary evidence can be collated, and the stock account prepared. Where the amounts of input tax are significant, HMRC may wish to verify the claim before making repayment. Where such a claim is submitted, it is good practice to prepare relevant information so that any check can be made easily.

Voluntary registration

A person who is not obliged to register can choose to do so voluntarily. He has to satisfy HMRC that he is carrying on a business, or intends to carry on a business, and that he is making taxable supplies. Satisfactory evidence will need to be provided. Usually, a covering letter is helpful, to pre-empt any questions that HMRC may wish to ask. As many as 20% of all VAT registered businesses fall into this category. The principle advantage lies where a business deals mainly with other VAT registered businesses, as it can claim input tax to which it otherwise would not be entitled.

September 2006

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


VAT Solutions (UK) Ltd
1 Dundonald Avenue
Stockton Heath
Warrington
WA4 6JT

(T) 01925 212244
(F) 01925 212255
(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 their website: