Updated on May 9, 2022
When it comes to running a business, it’s essential to know exactly which VAT costs you charge your consumers and when you can begin charging them.
You could get into difficulty with HMRC if you don’t apply the correct amount of taxes to your invoices or charge VAT before you’ve registered formally (HMRC).
In this article, we’ll go over some of the concerns that may emerge before you register with GOV.UK for VAT. We’ll go over who needs to register for VAT, how to register, and the ramifications of not registering on time.
This guide’s intricacies can only be deciphered if you have a basic understanding of VAT. Read our comprehensive VAT guide to get the lowdown on how VAT works, what it costs, how to charge it, and the many VAT plans accessible to small businesses.
Table of contents:
- What happens if I start charging VAT when not registered?
- Who needs to register for VAT?
- How to register for VAT
- What are the benefits of VAT registration?
- Can small businesses become VAT registered?
- Consequences of late VAT registration
- HMRC surcharges and penalties for VAT infringements
- Wrapping Up
What happens if I start charging VAT when not registered?
VAT registration is required by the UK government for all VAT-eligible sole traders, partnerships, and limited businesses. Some business transactions are exempt from value-added tax. Only enterprises that make more than £85,000 a year are required to register for VAT. However, businesses with revenues below this threshold might choose to register for VAT on their own volition.
According to HMRC, companies should always be aware of their VAT registration limit and how near they are. You must apply for a VAT registration number as soon as possible if you are nearing or have recently passed the threshold for VAT.
There are two ways to calculate your Effective Date of Registration (EDR): either before or after you passed the threshold. We’ll go into more depth about this process below. If you don’t apply on time, you could face fines for being late.
Too early VAT charging is as much of a concern as applying for UK VAT too late. You are not allowed to charge VAT to customers until you have registered for VAT in your jurisdiction. The penalty for charging VAT when you are not registered can be up to 100% of the VAT on the invoice, according to Schedule 41 of the Finance Act in 2008.
In addition, there is a 10% penalty for charging VAT before the due date. Even if you notify HMRC that you made a mistake, you will still be subject to this fine.
A VAT invoice is a necessary part of doing business in the UK, but if your VAT number has not yet arrived, it is still possible for your clients to be informed that they will be receiving a VAT invoice as soon as it arrives. Using a pro forma invoice, you can estimate the amount of VAT that will be charged in the future.
Who needs to register for VAT?
When your taxable income exceeds the registration threshold, you must register for VAT. There will be no change to the present yearly registration VAT threshold until 2022. As soon as a business is obligated to register for VAT and begins to charge for and pay VAT, it must do so immediately.
A historical turnover test, as previously noted, can be used to evaluate whether or not a VAT registration is required.
To determine your taxable turnover for the month under consideration, you must use the historic turnover test, sometimes known as a backward look. You have 30 days from the end of the month in which you reached the threshold to notify HMRC that you need to register.
To assess if you’ll be in the VAT red in the next 12 months, you can perform a future turnover test, often known as a forward look. For the next 12 months, you’ll need to figure out your average taxable income from this month. HMRC will need to know within 30 days that you’ve crossed the barrier for VAT registration, and you must do so.
Top Tip: Determining whether or not you can charge VAT is difficult because it is largely dependent on the specific things and services that you sell. Taxes must be paid on the £85,000 you earn. Because they are not considered taxable, sales that are exempt or outside the scope of this calculation are not included. Reduced rates and zero-rate transactions, on the other hand, are treated as taxable and will be included in the calculation. See our VAT exemption guide for further information on whether your sales are entirely taxable, totally exempt, or partially exempt.
Charges for VAT must be rectified if you have not been registered with HMRC. Credit notes or refunds issued to the consumers who were overcharged might be used to amend their VAT accounts.
HMRC should be contacted about an unprompted revelation of your error. If you have received VAT payments, indicate that you are willing to make amends.
How to register for VAT
You will have 30 days to register for your VAT number if you establish that you are qualified for VAT registration after studying the UK VAT scheme. HMRC’s website provides an easy way to accomplish this. Making Tax Digital has made the VAT application process much more user-friendly. HMRC will issue you a VAT registration number once you’ve completed the registration process.
Taxable supplies and items will not be subject to VAT until you receive your VAT registration number. As a result, you will need to consult HMRC’s guidance on the VAT rates you should charge your clients in order to calculate the appropriate VAT rate.
Depending on your VAT system, the types of goods or services you are selling, and whether or not they fit into the 20%, 5%, 0%, or exempt categories, the VAT rate that you charge will be determined.
Input tax is the VAT that you owe to your suppliers, and the rate that you pay will be established by your suppliers. The seller is ultimately responsible for determining what VAT rates to apply. If a seller makes a mistake, they must either fix it or pay a fine.
Your business can also claim back the VAT it pays on taxable charges and expenses if it is registered for VAT. Depending on your chosen VAT system, you may be able to claim your input tax VAT at different times. All of your VAT bills, both incoming and leaving must be meticulously documented, as must the precise computations when you file your VAT return, no matter what.
While it comes to VAT, it’s no surprise that 51% of people admit to making mistakes when filing their return. Avoiding common pitfalls requires familiarising yourself with the areas where blunders are likely to occur. We’ve put together this tutorial to help you prevent the most common VAT blunders, as well as how to fix them when you do make them.
What are the benefits of VAT registration?
To comply with the law, you must register for VAT if you’re about to cross the barrier. However, some people are persuaded to volunteer for early registration because of certain advantages (more on this in the next section).
Having a VAT number, for example, lends credibility to your company. Why? The fact that you’re making at least £85,000 each year shows your clients and consumers that you’ve established yourself as a legitimate business.
registration with the VAT also entails
After completing registration, you can claim VAT refunds on the taxable resources you purchase for your business. VAT refunds can be substantial if you acquire a lot of equipment. VAT registered businesses have the advantage of reclaiming input tax, despite the fact that all businesses must pay it if they purchase from a VAT registered company.
VAT that has already been paid can be claimed: Reclaiming VAT on prior purchases may also be possible in some situations. You will, however, require access to the VAT invoices and records for the time period for which you wish to make a claim.
It allows you to open up new markets: Because of a perceived lack of trustworthiness, some businesses refuse to work with others that aren’t VAT-registered. Certain sales opportunities may be closed to you if you cannot produce a valid VAT invoice.
You don’t have to worry about going over the VAT threshold and getting in trouble.. You won’t have to deal with HMRC because you’ll already be registered.
Can small businesses become VAT registered?
Even if your business is brand new, you can register for VAT as early as the first year of operation. It isn’t necessary to wait until you earn £85,000 to register for VAT, as previously stated.
Even if you haven’t exceeded the annual registration barrier, you can register for VAT voluntarily. Involuntary registration has the following advantages:
Reimbursement for business expenses; New business chances from VAT registered businesses; and a boost in reputation because businesses may presume you are making the £85,000 minimum sales required by VAT registered companies.
However, voluntary VAT registration implies that you’ll have to deal with more paperwork when invoicing customers. In order to comply with the regulations, you’ll need to spend more time, effort, organisation, and management. A professional accountant or bookkeeper could be needed to help with all of the additional documentation that comes with registering for VAT.
The obvious drawback of VAT registration is that your competitors may be able to charge less than you, reducing your competitiveness. That’s because non-VAT registered providers are exempt from charging VAT on their goods and services.
You’ll also have to charge a VAT surcharge, which raises your rates. Because of this, you’ll have to pay a higher fee to suppliers, and your consumers who buy your finished items or services will also have to pay VAT at the time of purchase. You may lose clients if you suddenly raise your pricing by 20% (the typical rate).
It’s up to you to decide whether or not VAT registration makes sense for your business if your annual turnover is less than £85,000. When you sell taxable supplies that are zero-rated, you should always think about registering voluntarily. A 0% output tax rate means that you can still claim all of your input VAT back as long as you are paying a standard rate for your goods.
Consequences of late VAT registration
VAT should not be charged on taxable supplies until you have been registered for it. Trying to collect VAT from clients before you’ve registered for VAT is a dubious business practise that can result in a variety of HMRC fines.
To be on the safe side, make sure you’re charging VAT when the time is correct. You may do this by looking forward or backward at your sales figures.
An additional penalty for contacting HMRC outside of HMRC’s scope of forward or backward looks is a percentage of the outstanding VAT.
5% if you register within 9 months of the due date
If you register during the first 18 months, you’ll get 10% off.
If you register more than 18 months late, you’ll get a 15% discount.
HMRC has the option to reduce any of these fines to a lesser extent.
HMRC surcharges and penalties for VAT infringements
Risky: VAT charging without registration is a bad idea. Defaulting on your VAT payments is also a risky move.
You must submit your VAT return on time if you have registered for VAT. As long as HMRC does not receive a VAT refund by a certain date, it will be regarded as a default. Due to the COVID-19 pandemic in which qualifying businesses can delay VAT payments, HMRC may extend this date.
All VAT returns are now done online, thus your return must be filed within seven days of the end of the month after the end of the VAT period. For example, for the quarter ending March 31st, the due date is May 7th.
The first time you fail to pay your VAT, you will receive a warning. Notice: Pay attention to this. Additional 2 percent of your unpaid tax will be added if you do not comply with the due date for payment of the VAT rate you were provided. If you make another error, this fee will rise to 5%, and then another 5% if you make any more mistakes. Assessments for surcharges will not be granted for amounts less than £400.
Your surcharge responsibility term becomes longer each time you fail to pay. Surcharges are only applied on late payments. When you’ve paid all of your returns on time for the past year without defaulting, the surcharge cycle will restart.
Top Tip: Businesses that are partially exempt have the most sophisticated VAT arrangements, and as a result, they are subject to more audits. Get educated if you’re concerned about how to calculate and pay your VAT as a partially exempt business. Read our VAT partial exemption guide for more information.
It’s a sure-fire method to get hit with additional penalties and taxes from HMRC if you’re not registered for VAT. Problematic is, however, the failure to charge VAT in line with your company’s chosen plan or VAT programme. Avoiding fines and being able to claim VAT back on purchases is made easier when you know what the VAT threshold is and how to register.
An accountant can assist you determine if your firm is required to register for VAT in a matter of minutes. Tax accountants can also help you understand all of the regulations, guidelines, and options that apply to your VAT situation. Check out our complete guide to small business accounting for a comprehensive review of the foundations of small business accounting, if you’re not sure how an accountant can aid you in VAT dealings or if you simply want to discover the benefits of consulting an accountant.
Top Tip: Tide’s accounting tools can streamline your VAT payments if you’re already registered and charging VAT. Registering for the account allows you to keep track of your spending and make sure you pay your VAT on time each year. To top it all off, you can effortlessly integrate your preferred accounting software to import, manage, and organise all of your transactions in a single app. Get started by opening a free business checking account.