Should your business register for Vat?
It has long been necessary for businesses to keep a careful eye on the level of their sales (unless their supplies are exempt from VAT) as breaching the VAT threshold, currently £85,000, would require them to register within a month of the breach. However, our experience is that many small business owners misunderstand how the VAT turnover is measured and we regularly come across businesses that have inadvertently exceeded the threshold and then potentially incur penalties and back payments of Vat which can have a severe impact on the viability of the business. The new requirements to register and submit returns under Making Tax Digital now place additional obligations on businesses.
Look behind you!
Businesses sometimes think that they should look at the business’s sales over their trading year. So, if the business has a trading year end of say 31st March, they review the sales over that period and if it was less than £85,000 they assess that they have not met the requirement to be Vat registered.
Other businesses sometimes look at their calculated profit figure and assess the requirement from that.
In fact business owners should take a backward look at their sales turnover on a ‘rolling’ 12 month basis at each month end. If they have breached the threshold of £85,000 when adding up all their sales over the previous 12 months then they should act without delay as in the majority of circumstances Vat registration will be required.
Downsides of registration for some businesses
Unfortunately, for businesses who sell to consumers (as opposed to other businesses), having to register for Vat if they reach the threshold can be quite a disincentive to increase trade. The effect on their profit margin of including 20% on the net price for Vat will usually bring their net profits down quite considerably and registration is something they will want to avoid at all costs. Therefore, it is worth taking tax advice on this matter well in advance if you think your business could end up in this situation as with careful planning the impact of Vat registration could be reduced or avoided. Of course all businesses reaching the Vat threshold will now have to register for MTD as well, and this will mean they’ll have to use software which is compatible with HMRC’s MTD requirements or engage a bookkeeper or accountant to do the submissions for them.
Potential upside of Vat registration
Another situation we often see are businesses whose sales are below the Vat threshold and who don’t have to register, but whose sales are mainly to other Vat registered businesses. The trick they sometimes overlook is that by voluntarily registering they will be able to reclaim Vat on the things they buy for their business. The amounts that can be reclaimed can be quite substantial. In fact we can potentially claim for asset purchases made over the last 4 years if you still have the assets in your business, and as well as being able to claim for more recent purchases on services.
These businesses also don’t have to worry about adding Vat to their sales invoices as their customer will happily claim it back from HMRC. A win-win situation!
Register on time!
Don’t forget, for businesses who are scheduled to submit a quarterly Vat return and have turnover in the proceeding 12 months exceeding the threshold, they must submit their returns by 7th of the next but one month, for example with a quarter end of 30th June the submission must be made by 7th August. Businesses who are new to Vat and those breaching the threshold must register for MTD at least 7 days before the submission deadline if paying by direct debit, otherwise at least 3 days before.
If you would like advice for your business on any of the issues raised in this article then please get in touch with us for a free consultation.