When the taxable turnover of a business reaches the VAT registration threshold (currently £83,000 per annum), it must register for VAT. The key point here is the words ‘taxable turnover’. Any income that you receive that is not counted as ‘taxable turnover’ is excluded from the £83,000 turnover figure when calculating VAT registration threshold.
This causes small businesses a surprising amount of problems, as they are often unsure what to include and what to leave out.
What is taxable turnover?
A business’s taxable turnover is its business income excluding any exempt or ‘outside the scope’ (see below) supplies that it makes. This will include any supplies that would be:
- standard rated;
- reduced rate (5%); or
- zero-rated
if it were registered for VAT.
What is not included?
There are a number of income streams that can be ignored when deciding if your business needs to register for VAT.
You do not take into account any income that is exempt from VAT. This will include the following common sources:
- any income from financial services or selling insurance;
- any rental income from properties or the sale of land or existing buildings; and
- betting, gaming or lotteries.
There are other sources of exempt income, but most businesses are unlikely to have them.
You also do not include any income which is ‘outside the scope of VAT’. This will include supplies of goods or services that are outside the scope of UK VAT because of the place of supply rules. This would include any sales of goods that take place outside the UK, for example buying goods in China and having them sent directly to a customer in the USA. The place of supply is outside the UK and the sale will not count towards your taxable turnover for VAT registration purposes.
Supplies of services to business customers in another EU member state or any customer outside the EU are treated as outside the scope of UK VAT and do not count towards your turnover for VAT registration purposes (e.g. supplying consultancy services to a business customer in France).
Other non-business income is also excluded, such as disbursements incurred on behalf of a client, grants, or any income from employment.
Businesses can also ignore one-off sales of capital assets so, for example, if a business sells a van that puts its turnover over the registration limit, the sale proceeds can be ignored.
Charities can also ignore any income from donations, one-off fund raising events and educational and training courses that they undertake.
When to register?
Businesses have to monitor their turnover on a rolling twelve-month basis, so at the end of each month you should check your turnover for the past twelve months to see if it has gone over the registration limit. You then have 30 days to inform HMRC and are registered from the first day of the following month.
Example: When to register?
A business exceeds the VAT registration threshold in September 2016. They have until 31 October to inform HMRC and will be registered for VAT from 1 November 2016.
If a business fails to register on time it will be subject to a penalty for late registration, so registering on time is important in order to avoid a penalty of up to 15% of the tax due.
Practical Tip:
Businesses need to monitor their turnover so that they register on time and avoid a penalty – but some turnover can be ignored for VAT registration purposes.
