Businesses need to register for VAT when they reach the VAT threshold but understanding when that is and what to take into account when calculating your trading income is a little more complex.
Businesses need to register for VAT when they reach the VAT threshold which is currently £85,000. This is £85,000 of trading income over a 12 month rolling period i.e from April one year to March the next year, or from November one year to October the next year. When you reach the threshold you will have to register for VAT within 30 days.
Unless you sell products or services which are exempt from VAT, you must total income from all your sales whether you would consider them to be zero rated or standard rated if you were already VAT registered. You must also add in the cost of any services you received from overseas businesses which were shown as "Reverse Charge". An example of this is Google Adwords as these become an income as well as an expense when VAT registered.
Sales exempt from VAT
Businesses which sell only products and services which are exempt from VAT cannot register for VAT and therefore cannot claim back VAT on any of their expenses. Examples of sales which are exempt include insurance, financial services, public postal services and stamps. Some businesses which provide exempt products or services may also provide services or goods which they must charge VAT on and therefore they must register for VAT when the income on these sales reaches the VAT threshold.
However once VAT registered the business can only claim back VAT on purchases in the same proportion as the income on which VAT is charged. For example, if 10% of income has VAT charged, then only 10% of the VAT on purchases can be claimed back. This calculation is called Partial Exemption. This is frequently the case with equestrian related businesses and property rental.
Zero rated sales
Businesses which sell only zero rated products such as books, newspapers, magazines, printed music, children's clothes, protective clothing, food, animals, some animal feed and hay must still register for VAT when they reach the registration threshold even though they don't charge VAT.
Once registered these businesses can claim back VAT on all the purchases which include VAT. It is therefore, advantageous for a business which sells solely zero rated products or services to register for VAT voluntarily before reaching the threshold as they will receive a refund of the VAT they have paid to suppliers from HMRC every quarter.
Most businesses, though, will not sell only zero-rated items and they must weigh up whether it is advantageous to register for VAT before reaching the VAT threshold. This will depend on whether they sell to consumers or to other VAT registered businesses.
Becoming VAT registered can be a little daunting for those new to business. It means keeping your accounts records organised and up to date and ensuring that you have VAT receipts for all the business expenses you want to claim back VAT on. There are rules about what you can and can't claim back VAT on and if you are doing your accounts yourself you should familiarise yourself with the VAT rules.
Once you are VAT registered you need to know whether the products or services you sell are Zero rated, Standard rated or Exempt from VAT and you must ensure you are supplying your customers with an invoice which contains the information required as a VAT registered business.
Once you have registered for VAT you will need to prepare and submit VAT returns to HMRC on a quarterly basis and from April 2023 you must do this through accounting software. This is known as MTD for VAT and businesses already registered for VAT and with turnover over the £85,000 threshold are already submitting their returns in this way.
Purchases prior to VAT registration
You may be able to claim back VAT on some of your purchases prior to VAT registration and can find guidance on this from HMRC.
Do you need support with your VAT?
Becoming VAT registered may seem complex and maintaining your accounts a chore but it is a necessity if you have a growing business. However it isn't a necessity for you to manage either the accounts or the VAT yourself when you can outsource. Our bookkeeping team work with VAT all the time and have the knowledge and experience to keep you on the right side of HMRC. And we can ensure you claim back all the VAT you are able to on your purchases prior to VAT registration.
If you need help with your accounts and VAT give us a call on 01722 341820 and see how we can make keeping your accounts and submitting your VAT returns stress-free.