Tag: VAT registration

When should I register for VAT?

A business must register for VAT once its turnover reaches the VAT registration threshold, currently £85,000 at the time of writing.

It’s important to understand that you will need to register for VAT when your taxable turnover exceeds £85,000 in any ‘rolling’ 12-month period, not in an accounting period.

What is a rolling 12 month period?

A rolling 12-month VAT period is any 12 month period of trading. After your first year in business, at the end of each month you will take your latest month and add it to the total figure, and remove the oldest month. So rather than looking a 12 month accounting period or tax year, a rolling period looks back at the previous 12 months of trading.

What happens if I am late to register for VAT?

If you’ve failed to register for VAT with HMRC on time, you will face penalties. It’s important to act quickly to reduce the penalties you will incur.

Penalties are calculated based on how much VAT is due as well as how late you were registering. The VAT that you owe from the point of registration will also be added to your penalty, so registering late can be very expensive.

You will be required to include VAT on all sales back to the date the business should have registered. That stands, even if no VAT was charged to your customers at that point. If most of your customers are VAT registered, this shouldn’t be too much of a problem, as you can raise a VAT only invoice to your customer and collect the payment. However, this could still cause cash flow problems depending on how quickly your customer pays the invoice.

If most of your customers aren’t VAT registered, you cannot charge the VAT onto them but you still need to pay that VAT to HMRC. Not only can this cause cash flow problems as mentioned above, but the additional costs will reduce your profits.

How much are the penalties?

As mentioned above, the penalties for failing to register for VAT on time will vary, depending on how late you were in registering. If you registered:

not more than 9 months late – 5%

more than 9 months but not more than 18 months late – 10%

more than 18 months late – 15%

There is a minimum penalty of £50.

HMRC will notify you of the amount in writing together with information on how you can appeal against the penalty if you think you should not be penalised or the amount of penalty is wrong.

What if I have a reasonable excuse for not registering for VAT?

If HMRC agree that there’s a reasonable excuse for the late registration, you will not be liable to a penalty.

There’s no legal definition of ‘reasonable excuse’ but HMRC will consider each individual case and the circumstances that led to the late registration.

If you can show that your conduct was that of a conscientious business person who wanted to comply with VAT requirements, then there may be a reasonable excuse. For example, if an individual is solely responsible for a business and they or a family member were seriously ill at the time when they should have registered for VAT, this will be taken into consideration.

The following guidelines show circumstances where there might be a reasonable excuse for failing to register on time.

• Bereavement
• Doubt about liability of supplies
• Uncertainty about employment status
• Serious illness

What isn’t considered a reasonable excuse?

Genuine mistakes, honesty and acting in good faith are not accepted as reasonable excuses for penalty purposes. Also the law provides specifically that you do not have a reasonable excuse if:

• you cannot afford to pay
• you or a person acting on your behalf acted in good faith

If the circumstances of your case fall short of reasonable excuse, there may still be grounds to mitigate (reduce) the penalty.

What about other mitigating circumstances?

A penalty can be reduced if there are mitigating circumstances that fall short of a reasonable excuse.

Like reasonable excuses, the law does not define the grounds for mitigation but it specifically excludes:

• your lack of funds to pay any tax or penalty due
• the fact that little or no tax has been lost
• the fact that you acted in good faith

When HMRC consider mitigation, they will look at all the facts which led to the late registration. The amount of mitigation allowed will depend on the circumstances of the case. HMRC can mitigate the penalty to nil but such cases are likely to be exceptional.

What happens when I’ve registered for VAT?

As of April 2019, the Government introduced ‘Making Tax Digital’. That requires all VAT registered businesses to keep their accounting records on cloud-based software such as Xero, which is our recommended software.

You will be required to complete a VAT return for each quarter. The deadline for submitting your return online is one calendar month and 7 days after the end of the VAT quarter. For example, if your VAT quarter ends on 31st March, you will need to file the return by the 7th May. This is also the deadline for paying HMRC.

If you set up and pay by direct debit, you will receive an additional three days before payment is taken, i.e. 10th May.

What happens if I file my VAT returns late?

It’s important to file your VAT returns on time.

If you miss the deadline for submitting your return HMRC will record a ‘default’ on your account. Once you’ve defaulted, you’ll begin a 12 month ‘surcharge period’. A surcharge is an extra amount on top of the VAT you owe.

Are you struggling and in need of help?

If you have any questions about VAT registration, please get in touch and we will be happy to help! You can call us on 01386 366741.

The short answer is possibly, but we don’t recommend that you risk it unless there are valid commercial reasons.

When a business reaches a turnover level of £85,000 or more, in any 12 month period, it needs to register for VAT.

Some business owners when operating two trades, believe that they can run two or more businesses separately from each other to avoid reaching the VAT registration threshold which is £85,000. This approach is often considered as a way of avoiding charging 20% VAT to their customers who aren’t VAT registered, typically the general public. An example of this would be a hairdressing business who has not VAT registered individuals as customers.

 

Don’t Think Like Bob

Bob’s Builders & Carpentry has a total taxable annual turnover of £130,000 and is a VAT registered business, supplying a range of building services to domestic customers.

However, Bob believes that if he separates his business and splits them into two entities, he will no longer need to be VAT registered.

Bob feels that he offers two very different services and that they should be separated for VAT purposes.

Bob’s Builders expected annual turnover is £80,000 and Bob’s Carpentry is £50,000 – individually, both levels of turnover fall under the VAT registration but total £130,000.

Bob’s plan is to run Bob’s Buiders as a sole trader business and form a partnership business with his wife to run Bob’s Carpentry.

 

HMRC’S View

Although neither of Bob’s businesses exceed the VAT registration threshold individually,

HMRC consider the above approach as ‘artificial separation’ because when combined, the total turnover from both trades exceeds the VAT threshold. In this situation, HMRC would force VAT registration to take place.

 

What are the rules?

As always with most tax matters, deciding if business splitting and VAT avoidance has taken place is not always straight forward.

HMRC has detailed guidance surrounding on this subject here.

HMRC will look to see if:

• The separate entities supply both VAT registered and unregistered customers
• Both entities use the same equipment and premises
• Splitting up what is usually a single supply (i.e. a hotel separating bed and breakfast)
• Separating two businesses which maintain the appearance of a single business (see Bob above!)
• Both entities being control by the same management

A key question that a HMRC tribunal will ask to establish if the businesses are artificially separated is:

“Are the businesses closely bound by financial, economic and organisational links?”

Financial links

• Is financial support given by one business to another?
• Would one part not be financially viable without support from another part?
• Is there a common financial interest in the proceeds of the business?

 

Economic links

• Are both entities seeking to realise the same economic objective?

• Is there a mutual benefit to each business from the activities of the other?
• Do the activities of one entity benefit the other?
• Are both entities supplying the same customers?

 

Organisational links

• Are both entities ran by the same management?
• Do both entities employee the same staff?
• Do they use the same premises?
• Do they share equipment and resources?

 

HMRC will also consider structural separation of the businesses:

Structural Separation

HMRC will also consider how the businesses are structured:

• Do both entities have separate bank accounts?
• Is there separate advertising and marketing activities?
• Is there separate bookkeeping and accounting?
• Does each entity have it’s own branding, logo and website?
• Are there separate insurance policies? 

 

But can it be done?

There can be valid commercial reasons for having two or more businesses when they are genuinely different businesses. However, before considering splitting any business, you need to consider if separately, they have any financial, economic and organisational links.

If separated properly, there can be useful savings whilst VAT registration is postponed but both businesses must be operating completely separately and independently from each other.

Business owners must use common sense and reasonable judgement, but every case is unique and so consulting with a specialist tax adviser is always advised. HMRC rules are applied on a case by case basis and you must carefully plan to avoid falling foul of these regulations. There is no one single factor that decides whether your particular business split is acceptable.