VAT is complicated and I get so many questions about when you should VAT register, how you do it and do I qualify for fixed rate? The below is a start (VAT is truly complicated and there are professionals who spend their whole careers just working with VAT complexities) but below are some simple rules and as always if in doubt give me a call.
VAT Registration
VAT registration can be opted into before you meet the registration requirement. This can be beneficial if you buy more VAT registered goods than you sell or even if you just want to know you do not have to worry about the admin of catching the right time to apply.
However, you MUST register for VAT when your total VAT taxable turnover for the last 12 months is over £85,000. This is done on a rolling basis, meaning that if today is the 15 January 2024 the rolling 12 months you should be looking at is 1 January 2023 to 31 December 2023 regardless of when you actual year end is. When you reach the 1 February 2024 the rolling 12 months you should be looking at is 1 February 2023 to the 31 January 2024.
Please note this is your total VAT TAXABLE TURNOVER. So, all of the income from the sales you make on goods and services which attract VAT (even if the percentage of VAT is 0%). If you are close to the VAT threshold, I would suggest getting some bookkeeping help to keep your accounts up to date to identify exactly when you go over the threshold to avoid penalties. Sometimes waiting until the year end for your traditional accountant to have a look can mean you are very overdue becoming registered.
You need to register for VAT within 30 days of the end of the month when you went over the threshold. If you went over the threshold on 1 December 2023, then the end of the month VAT taxable turnover exceeded £85,000 was 31 December 2023 and you must register by the 30 January 2024. Your effective date of registration (i.e., the date you must start charging VAT on your sales is the first day of the second month after you go over this threshold – so in this case the 1 February 2024.
Application can be made on line by completing a form online. Your tax agent can also do this for you.
Flat Rate Scheme
The amount of VAT you pay is normally the difference between the VAT you charge on your sales and the VAT you can prove you paid on your expenses.
If you qualify for the Flat Rate scheme you:
- Pay a fixed rate of VAT (less than 20%)
- You keep the difference between what you charge your customers and pay to HMRC
- You cannot reclaim the VAT you make on your purchases except for certain capital assets over £2,000
Sometimes the Flat Rate Scheme (FRS) is not suitable as you would end up paying more VAT than you would under the standard scheme. However, it is always worth looking into.
To join the scheme your VAT turnover must be £150,000 or less (excluding VAT) and you have to apply to HMRC.
Eligibility
You can join the scheme if:
- You are a VAT-registered business
- You expect your VAT taxable turnover to be £150,000 or less (excluding VAT)
You cannot use it if:
- You left the scheme in the last 12 months
- You committed a VAT offense in the last 12 months
- You joined a VAT group in the last 24 months
- You registered for VAT as a business division in the last 24 months
- Your business in closely associated with another business
- You have earned a margin or capital goods VAT scheme
You must leave the scheme if:
- You are no longer eligible to be in it
- On the anniversary of joining your turnover for the last 12 months was more than £230,000 excluding VAT (or you expect it to be in the next 12 months)
- You expect your total income in the next 30 days to be more than £230,000 (including VAT)
Work out your flat rate
Your flat rate % usually depends on your business type. You may pay a different rate if you only spend a small amount on goods.
First step is to work out if you are classed as a limited cost business. You are a limited cost business if your goods cost less than either:
- 2% of your turnover or
- £1,000 a year (if your costs are more than 2%)
If this happens you pay VAT at 16.5%. There is a way to work out if you need to pay this higher rate and work out which goods count as costs. This is at the link: Calculate if you need to pay the 16.5% FRS.
If you are not a limited cost business then you can use your business type to work out your flat rate and there are many different types of business with the percentages listed on the HMRC website.
Capital assets over £2,000
If you use the Flat Rate Scheme you can reclaim VAT on a single purchase of capital expenditure item if the amount of the purchase including VAT is £2000 or more.
Reporting to HMRC
If you are registered for VAT you are responsible for periodically (usually quarterly) reporting to HMRC your taxable sales and expenses and paying over the net VAT collected on HMRC behalf.
There are some excellent free software providers to help with this: Check out My Tax Digital but I would always recommend at least initially getting advice. As mentioned above VAT is hugely complicated in a lot of cases and relies not just on HMRC rules and guidance but also on legal precedent. Absolutely you can go it alone from a VAT perspective but I would suggest initial advice on what your business needs to record its VAT accurately and effectively and what records need to be kept from a professional.
As always happy to help with any specific questions about your business.
