Andrew Needham looks at what income needs to be included in a business’s ‘taxable turnover’ when considering if it needs to become VAT registered and what can be excluded.
When a business’s taxable turnover reaches the VAT registration threshold, currently £85,000 per annum, it must register for VAT. The key point here is the words ‘taxable turnover’. Any income that a business receives that is not counted as ‘taxable turnover’ is excluded when calculating the VAT registration threshold.
This causes small businesses a surprising number of problems as they are often unsure about 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 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 a business needs to register for VAT. A business does not take into account any income that is exempt from VAT. The most common sources include:
- 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.
A business also does not include any income that 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, e.g. 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 a business’s 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 a business’s turnover for VAT registration purposes. For example, supplying consultancy services to a business customer in France would not be included.
Other non-business income is also excluded, such as disbursement incurred on behalf of a client, grants, or any income from employment.
Businesses can also ignore one-off sales of capital assets. For example, if a business sells a van that puts its turnover over the registration threshold, the sale proceeds can be ignored.
When to register?
Businesses have to monitor their turnover on a rolling 12-month basis, so at the end of each month a business should check its turnover for the preceding 12 months to see if it has gone over the registration limit. It then has 30 days to inform HMRC and is registered for VAT from the first day of the following month.
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Example: Registering for VAT on time 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. The longer the delay in registering, the higher the rate of penalty applied. |
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.
