VAT registration issues

The VAT registration threshold has been frozen at £85,000 until at least 31 March 2022. This may bring more businesses into the VAT fold if they increase their prices with the rate of inflation.

This threshold can be a harsh cliff edge, as once VAT turnover exceeds it the business must charge VAT on all eligible sales. It must also keep its VAT records in a digital format and submit its VAT returns using MTD-compatible software.

For your UK sales, you must check the cumulative total of your VATable sales (including zero-rated items) for every rolling 12-month period and register for VAT within 30 days, once this total exceeds £85,000.

Do this calculation every month, as if you tally up your sales just once a year for your accounts, you may miss this 30 day deadline. If your sales suddenly take off, you may be too busy to remember to register for VAT within 30 days. If you register later than the law demands, you can suffer a penalty.

For example, say your annual sales (accruing evenly throughout the year) are £83,000. If you increase your prices by 3% in January 2020, by 31 October 2020 your turnover in the previous 12 months will be £85,075 and you will have to register for VAT within 30 days.

You could restrict your price increase to keep your turnover under £85,000, but if your purchase costs are increasing this will cut your profit margins. Alternatively, you could perhaps restrict your sales by taking longer holidays, if you can afford it.

Another idea is to hive off a part of your business into a separate legal entity, so that each new business has turnover under £85,000. However, this must not be an artificial split.

The two businesses should have a bank account each, keep separate business records and file separate tax returns. Ideally, the businesses should provide different services or goods to separate groups of customers. There must be separate contracts with any common suppliers.

Many businesses, may wish to register for VAT earlier than needed. Early registration allows you to claim back VAT on your start-up expenses. You can reclaim VAT on services used within the six months before your VAT registration date, and on goods acquired within four years before that date (if they are still held at the date of registration). The VAT paid on an expensive shop refit could be lost if you delay VAT registration for too long.

However, its a balancing act if you register earlier than required, you must account for VAT on sales made after your registration date that could otherwise have been VAT-free.

You cant change the VAT registration date requested once you’ve applied to register. Its very important to plan your VAT registration, to ensure the registration date falls at the optimum time for your business.

Businesses that sell digital services (such as eBooks or software) to non business customers in EU countries are not required to register for VAT in those EU countries, if the total value of their digital sales to other EU countries is less than £8,818, but this threshold only applies while the UK is a member of the EU.

When the UK is no longer treated as a member of the EU, you will need to register for VAT in an EU country if you sell any digital services to non-business customers in EU countries. You will also have to charge the correct rate of VAT on your digital services provided in each EU country where your non-business customers belong.

Action Point!
Check your total sales on a 12-month rolling basis.