The basic rules on VAT registration are outlined by Richard Curtis.
VAT was introduced just over 50 years ago as a ‘simple tax’; but anyone familiar with its machinations, particularly its exemptions and exceptions, will know this is a misnomer.
However, before we get to other complications, difficulties can arise from the outset. First, a person (an individual or a company) can choose to register for VAT voluntarily. While this means that output VAT must be charged on taxable supplies of goods and services, input VAT will generally be recoverable on business purchases. This may be particularly useful if their supplies are liable at the zero rate or if their customers are also VAT registered and can recover this charge. Note that, usually, input VAT would not be recoverable if this relates to supplies that are VAT exempt.
Compulsory registration
As well as voluntary registration, the VATA 1994, Sch 1 states that a person who makes taxable supplies must register if one of two conditions or tests is met.
- Under the ‘backward look’ test, a person must register if, at the end of any month, the value of taxable supplies in the past year has exceeded the registration threshold, currently £85,000 (VATA 1994, Sch 1, para 1(1)(a)).
- Under the ‘forward look’ test, registration is required if, at any time, there are reasonable grounds for believing that the value of taxable supplies in the next 30 days will exceed the registration threshold (VATA 1994, Sch 1, para 1(1)(b)).
Note that the legislation refers to ‘taxable supplies’, suggesting that these will be made on an ongoing basis rather than a single supply with no likelihood of more being made. Furthermore, these supplies must be made in the course or furtherance of a business. A hobbyist would not have to register, but such a person should review this if it seems that what started as a hobby has turned into a business.
Registration
Having determined that either the forward or backward look tests have been met, the person should register for VAT (this can be done using the Government Gateway) and this will take effect from the end of the month after the month in which they became liable under one of the above tests. An earlier date can be agreed between HMRC and the person.
Delaying notification will not delay registration. If HMRC is not notified at the correct time, a VAT liability may be accruing. Businesses should therefore monitor their turnover; waiting until accounts have been prepared for the first year of trading may be too late. Although the backward look test refers to supplies in the past year, if the threshold is exceeded in a shorter time, registration is required.
Person not business
Although VAT-exempt supplies are not included in taxable turnover, it is a ‘person’ rather than a ‘business’ that is registered, so all taxable income from economic activity must be taken into account.
For example, an individual may carry on a building business and have taxable supplies of £80,000 in their first year. This is less than the threshold, so on its own, registration would not be required. However, if they also had income of £10,000 a year from a holiday home (also subject to VAT), this must be included in their taxable supplies. VAT would then be chargeable on both sources of income. If, say, the holiday let was in the joint names of spouses or civil partners, or if the building business was carried on by a limited company, these activities would be carried on by different ‘persons’ and the incomes would not need to be aggregated. But beware of splitting businesses artificially because HMRC may invoke the anti-disaggregation rules.
Practical tip
Businesses should monitor their turnover on an ongoing monthly basis, to check that the registration limit has not been exceeded.
