Understanding the latest changes to VAT registration

Each year the Government unveils its Spring budget ahead of the start of a new tax year, and as a finance expert I look at what crucial changes SMEs need to be aware of on the back of the announcement. Now this is usually quite straightforward to do as there tends to be a couple of things that impact them directly, one of my favourites being the changes to capital allowances which I have written about for a couple of years now.

Having listened to the budget announcement and having reread the highlights in case I had missed something, apart from the 2p deduction to employee national insurance contributions, unless you’re a vaping non-dom with numerous holiday lets, there isn’t too much to get excited about. The budget has been described as an “election year budget” and therefore seemed to prioritise individual taxpayers rather than look at ways to support businesses through what continues to be a difficult and turbulent economic climate, with the most notable items focusing on a further freeze of alcohol and fuel duty which will mostly support the hospitality and transport industries.

So, in the absence of tangible changes to explain, I thought I’d focus instead on VAT registration and explain it in more detail. This is relevant to some of the businesses we support, our suppliers, our introducers and the customers of our clients. In the budget, the threshold at which small businesses must register to pay VAT will be raised from £85,000 to £90,000 from April. The last time the threshold was raised was back in 2017 and the 2024 increase will at least do something to make up for the impact of inflation over the past seven years. It will be interesting to see whether the Government allows for some annual increases going forward or will wait a few years for another larger step increase.

But what does the threshold mean, how do you measure against it, and what are the implications of not complying.

For the most part, it’s all based around comparing your taxable turnover to the threshold. Your taxable turnover is the total value of everything you sell that is not exempt from VAT. The HMRC website gives a list of examples of the different VAT rates on goods and services VAT rates on different goods and services – GOV.UK (www.gov.uk).  Goods and services that are exempt from VAT include: Bingo, gaming and betting, burials of dead people, provision of education by eligible bodies and admission to charitable events. Exemption from VAT isn’t to be confused with zero rated VAT supplies.

So you must register for VAT if:

• your total VAT taxable turnover for the last 12 months was over £85,000 (£90,000 from April) or
• you expect your annual turnover to go over £85,000 in the next 30 days (£90,000 from April).

Taking each one in turn

Looking back, if you exceeded the threshold in the last 12 months you must register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold. What this means is that if you realise in say March that you’ve gone over the threshold in the preceding 12 months, then you have until the 30^th April to register and the effective date of registration would be 1 May.

For the forward-looking test, if your annual turnover is going to exceed the threshold in the next 30 days, you must register for VAT within that 30 day period. The effective date is the date you realised that the threshold would be exceeded, not the day it actually did so.

Voluntary Registration

You don’t need to have turnover over the threshold to register for VAT, you can do so voluntarily. You might want to do this if you’re supplying companies who themselves are VAT registered and can recover the 20% increase through their own VAT return and you yourself have considerable purchases that have VAT on them.

How do you register for VAT?

You can do this online through the HMRC website and this details all the information you need. It also explains what to do between registering for VAT and getting your VAT number Register for VAT: How to register for VAT – GOV.UK (www.gov.uk)

Once you’re VAT registered, what do you have to do?

You need to:

• include VAT in the price of all goods and services at the correct rate (the standard rate of VAT is 20% but different products and services can be on other rates – remember to check the HMRC website VAT rates – GOV.UK (www.gov.uk);
• keep records of how much VAT you pay for things that your business bus;
• report the amount of VAT you charged your customers and the amount of VAT you paid to other businesses by sending HMRC a VAT return online – usually once a quarter; and
• pay any VAT you owe to HMRC

If you have added more VAT on to your goods and services than you have paid on your acquisitions, then you’ll need to pay this difference across to HMRC. If it’s the other way around, then HMRC will repay you.

The VAT registration threshold can sometimes create a bit of a barrier to expansion. If your turnover is bubbling away under the threshold and you decide to try and grow, then adding 20% on to your invoices might make you uncompetitive if you’re supplying companies who aren’t VAT registered (and therefore can’t reclaim this cost through their own VAT return) or are competing with others who continue to be under the threshold.

But there are strict penalties for late registration. If you’re under 9 months late, then the penalty is 5% of the net amount due over this period, increasing to 10% if over 9 months but under 18 months, then 15% for anything later than this.

The HMRC website is quite well laid out and covers a lot of areas quite clearly.  Just make sure that you go to the Government / HMRC websites when searching for VAT questions online, as some of the first search results can be third parties which may provide the service for a charge, but you should always start with HMRC or your trusted tax advisor.