Registering for VAT - what you need to know

This blog post was first published on 10 April 2014 and was last updated on 14 April 2016.

VAT can be very frightening for anyone who runs their own small business, especially if you’re already struggling with paperwork and wondering what you should be telling the taxman. So what is VAT, does it affect you, and - if so - how do you register for it?

A quick introduction

VAT is short for Value Added Tax - or as I like to call it, Very Awkward Tax - and it’s a tax that’s charged on most sales of goods and services in the UK.

When your business makes sales, you don’t charge VAT to your customers unless you’re registered with HMRC to do so. Sales on which VAT would normally be charged are called “taxable sales”. Sales that are exempt from VAT, or outside the scope of UK VAT, are not taxable sales.

At present you only have to register your business if its annual taxable sales are over the limit set by HMRC which, as of April 1st 2016, is £83,000.

Do I need to register for VAT?

If your annual taxable sales are above £83,000 per year, or they will pass that limit in the next 30 days, then you must register for VAT (this is called compulsory registration).

In some cases you may also wish to register earlier - which is called voluntary registration. Registering before you have to do so can help your cash flow, because being registered for VAT allows your business to claim back input VAT on its costs (we’ll explain more about this later).

However if your customers are members of the general public or small businesses who aren’t registered for VAT themselves, it may not a good idea to register voluntarily, as you would have to charge them VAT which they wouldn't be able to claim back. This could mean that your customers might feel your prices are higher.

You can register for VAT either by filling in a paper form or registering online. If HMRC accept your application for registration, they will send you a certificate confirming this, which will also show your business’s unique VAT reference number.

OK, I’m registered - what next?

Once your business is registered for VAT, then it has to charge VAT on all the taxable sales it makes to its customers. The VAT you charge to your customers is called “output VAT”.

Your business will also be able to reclaim some of the VAT that its suppliers charge. (I say “some” advisedly, because there are some supplies on which VAT can’t be reclaimed, such as entertaining anyone other than staff). VAT that can be reclaimed is called “input VAT”.

VAT-registered businesses must file a regular report called a VAT return to HMRC. Your VAT return shows your business’s output VAT, less its input VAT - and the difference is what you must pay to HMRC.

If your input VAT is greater than your output VAT, lucky you – you’ll get a refund from HMRC!

Managing the transition period

You apply to be registered for VAT as from a certain date. There will usually be an interim period between that date and the arrival of your certificate and VAT registration number.

You’ll have to charge output VAT on any sales after your registration date – but until your VAT registration number arrives, you can’t issue official VAT invoices.

Reached an impasse? What you’ll need to do is add the relevant rate of VAT - usually 20% - to the total value of all your invoices as from the date you’ve applied to be registered from, so that you don’t have to go back and ask your customers for more money.

Once your VAT registration number comes through, you’ll then need to re-issue any invoices you’ve issued in the interim period to your customers. This is so that your customers have official VAT invoices and can reclaim input VAT on the goods or services they’ve bought from you, because HMRC say that you can’t reclaim VAT unless it’s shown on a proper VAT invoice.

Remember that VAT can be exceptionally confusing, so if you have any queries about VAT and how it affects your business in general, you should check with HMRC or speak to your accountant for more advice.

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