Reason why a limited company has to be VAT registered in the UK?

New business owners, contractors, freelancers, and start-ups often ask us if they need to register for Value Added Tax (VAT) if they run a limited company.

VAT registration in the UK is not compulsory, but there are strict rules about how, when, and why limited companies should register for VAT. The rules are based on VAT taxable turnover, but VAT registration can have other benefits.

In this blog, we’ll cover what you need to know about VAT and the VAT registration process and rules. But let’s start with some basics.

What is VAT?

Definition of VAT and its purpose

Value Added Tax (VAT) is the tax on the goods and services a business sells. It is a consumption tax on goods and services sold in the European Union (EU).

If businesses are VAT registered, VAT is charged at each stage of the process, from producing and distributing goods to their ultimate sale. VAT is paid by everyone, from companies to individual consumers.

Limited companies that are VAT registered and that charge VAT to their customers must pay the VAT collected to HMRC every three months. Your business must file a VAT return showing VAT charged and VAT paid. Your company can claim the VAT paid back, which can be offset against the VAT the company has charged.

VAT is designed as a broad-based tax applied to a wide range of goods and services, and its revenue contributes to government funds for public expenditures and services.

VAT registration is not mandatory for all limited companies in the EU, but businesses exceeding a certain sales threshold must register for VAT.

VAT rates and types of supplies

Three different VAT rates can be added to products. Which one applies depends on the goods and services and how they’re used.

Most goods and services in the UK are charged at the standard VAT rate of 20%.

There is also a reduced VAT rate of 5%, charged on supplies such as power, energy savings, and heating.

Some supplies are exempt from VAT (i.e. 0% VAT charged). This includes supplies in healthcare, education, charities, food and drink for human consumption, children’s clothing and footwear, and some land and property supplies.

VAT registration requirements

VAT registration threshold and VAT taxable turnover

Limited companies with a VAT taxable turnover exceeding £90,000 in a 12-month period must register for VAT. HMRC defines VAT taxable turnover as: “The total value of everything you sell that is not exempt from VAT.”

If your taxable turnover is expected to exceed this figure in the next 30 days, you must register for VAT immediately.

Compulsory registration and its requirements

Businesses that exceed the VAT threshold must register for VAT. You must register within 30 days of your turnover reaching the VAT threshold or the expectation that it will be reached in the next 30 days.

Once registered, your business is required to charge VAT on its sales and account for VAT on its purchases. Businesses must submit quarterly VAT returns and pay the VAT owed to HMRC quarterly.

Voluntary VAT registration

Even if your business does not meet the compulsory requirements to register for VAT, you can choose to register voluntarily, even if your taxable turnover is below the VAT registration threshold.

Many VAT-registered businesses voluntarily register for VAT, which can offer many benefits (see below).

Benefits of being a VAT-registered business

There can be benefits of being registered for VAT. Here are some of the VAT registration benefits below:

• It can make you look like a bigger business or enhance your brand if you charge VAT.

• If you sell to VAT-registered businesses, they can reclaim the VAT they pay you from HMRC so that it won’t affect your selling price to them. However, it will affect the price your non-VAT registered businesses and consumers pay.

• You can recover the VAT on the costs of goods and services purchased for your business.

• If you are in a VAT reclaim situation, you will be better off (i.e. you pay more VAT than you charge).

• Voluntary registration can prevent you from creeping over the VAT registration threshold and forgetting to become VAT-registered. You could incur penalties from HMRC if this happens.

• You may reclaim VAT on goods bought up to four years before you registered for VAT as long as you’re still using the goods, have been trading throughout the period, and have VAT invoices and records as proof. You can also claim VAT on services up to six months before registering for VAT.

The disadvantage of being VAT-registered

Being VAT registered can have some disadvantages, so if you have a choice as you haven’t hit the VAT threshold, you need to consider these.

• Some of your clients and customers may not be VAT registered (which means they cannot reclaim the VAT on your invoice). This may make your products or services more expensive.

• You must carefully manage cash flow and ensure you have the money each quarter to pay your VAT bill.

• VAT-registered companies must maintain precise records, particularly all VAT invoices and receipts, and file a quarterly VAT return. This can add to your own time or the time and costs of your accountant.

VAT registration process

How to become VAT registered

If you decide that becoming VAT registered is the right thing for you and your business, or you are likely to exceed the VAT threshold, you must register with HMRC. (Remember: You must register within 30 days of your turnover reaching the VAT threshold or the expectation that it will be reached in the next 30 days).

Most limited companies can register for VAT online. By registering for VAT, you will be given a Government Gateway account. This account will be used to submit quarterly VAT returns to HMRC.

Once everything is approved, your VAT registration certificate should be received in your VAT online account within 30 working days. You’ll be issued a VAT registration number for your invoices and correspondence. You’ll also be told the submission deadline for your first VAT return.

Here at dns accountants, we offer a comprehensive VAT registration and VAT return service.

Registration date and VAT registration number

The registration date is the date from which a business becomes VAT-registered. You will be issued a VAT registration number. This is a unique number assigned to each VAT-registered business. Companies must use their VAT registration number on all VAT invoices and VAT returns.

Who does not have to register for VAT?

Exemptions and exceptions from VAT Registration

Not all businesses have to register for VAT. Businesses with a taxable turnover below £90,000 in the past 12-month period are not required to register for VAT.

Some types of businesses, such as charities and non-profit organisations, are exempt from VAT registration.

If you only sell or otherwise supply goods or services exempt from VAT, your business is exempt.

Consequences of not registering for VAT and not charging VAT on supplies

Failure to register your business for VAT when necessary means you may face penalties and fines from HMRC. Your company may also face interest charges on unpaid VAT.

If you fail to charge VAT on your sales once you register, your business may face penalties, fines, and interest charges on unpaid VAT.

Submitting VAT returns

You will need to submit VAT returns to HMRC quarterly, so they know how much you need to pay or how much they should refund you. If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC. If you’ve spent more than you charged, you can claim this back from HMRC.

Record keeping and VAT

Schemes which might help with VAT Accounting

Several schemes, including the cash accounting scheme and the annual accounting scheme, are available to help with VAT accounting.

The cash accounting scheme allows businesses to account for VAT based on payments received and made.

The annual accounting scheme allows businesses to complete a single annual VAT return.

Cancelling VAT registration

You can cancel your registration if your business ceases trading or its taxable turnover falls below the VAT registration threshold. You’ll need to notify HMRC of your intention to cancel your registration.

Cancelling VAT registration can have consequences for businesses, including the loss of VAT registration benefits.

Claiming back VAT

Claiming back VAT when not VAT registered

In general, you must be VAT registered to claim VAT on the goods and services you’ve purchased for your business.

However, some exceptions exist, such as non-VAT registered individuals being unable to reclaim VAT on most business expenses. For example, you can claim VAT back if your organisation is a local authority, academy school or charity. This includes VAT paid on capital assets, exports outside of the EU and expenses related to charitable activities.

VAT reclaim opportunities

VAT registration can provide your business with VAT reclaim opportunities and benefits. If you recover VAT on your purchases above the VAT you charge on sales, you can get a VAT refund.

The importance of being VAT registered

VAT registration is compulsory for your business if your taxable turnover reaches the VAT registration threshold. VAT registration can give your business VAT reclaim opportunities and many other benefits.

To many people, VAT appears to be a complex tax with lots of administration. Deciding whether to register for VAT is key, particularly for business start-ups.

The dns VAT return service is a cost-effective VAT registration and VAT returns service that helps you register for VAT and file accurate VAT returns on time, every time.

For more help and advice on registering for VAT, VAT returns and VAT reclaims contact us today at 033 0088 3616, email contact@dnsaccountants.co.uk or book a free consultation.

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