All growing businesses will become VAT registered. It is not daunting. You just need to become organised with your record keeping and remember your VAT return deadlines. So what do you need to know about becoming VAT registered?
The new VAT threshold for 2017-18 is £85,000. What should you do next if you are close to this threshold or have reached it?
If you will reach this threshold within a 12 month rolling period you must register for VAT although you can voluntarily register before you reach that threshold. Some businesses will register voluntarily because they will then be able to reclaim VAT on their costs which will help their cash flow, others because it makes them look a larger, more established business. Many, though, do not want to register at all and therefore keep their annual turnover below the VAT registration threshold.
If you have reached the VAT registration threshold you must register within 30 days of reaching that threshold. You may receive a penalty depending on how late your VAT registration is and how much you owe. Even if you do not receive a penalty you will be expected to pay the VAT on sales from the date you exceeded the VAT threshold which will mean losing 20% of your income as you will not have been charging VAT to your customers.
You can register for VAT online through HMRC website. You do not have to register as soon as you start a business unless you choose to do so.
If you temporarily go over the VAT registration threshold you can apply to HMRC not to be VAT registered.
As soon as you register for VAT or from the date you have applied to be VAT registered you must charge your customers VAT so your charges will be 20% more than before you were VAT registered. However you cannot show the VAT breakdown on your invoice until you have received your VAT number and VAT registration certificate from HMRC who advise that this will take 14 days. You are liable to pay the extra 20% to HMRC and to provide your customers with a VAT invoice showing your VAT number once you have received it. So for the period of time it takes your VAT registration to be completed you will provide your customers with an initial invoice showing just the total to include an extra 20% and then will follow that with a VAT invoice containing all the information you are expected to put on a VAT invoice including the breakdown of the figures and the VAT rate.
If you are selling online you may need to increase your prices but cannot provide a VAT receipt until you have your VAT registration certificate. Shop sales will need to be increased to accommodate the 20% VAT you will have to pay to HMRC.
Your VAT registration certificate is important because it not only shows your VAT number, it will show the effective date of your VAT registration and when to submit your first VAT return. This is the only indication you will receive of when and for what period your first return is due.
Once you are VAT registered it is your responsibility to ensure you charge the correct rate and amount of VAT for the services or products you sell, You must keep a VAT record showing your net sales and VAT and net purchases and VAT you are reclaiming. You will need to know what purchases you can claim VAT back on and must ensure you have the supporting documentation containing a VAT number in order to reclaim VAT.
Your VAT returns must be submitted on time to avoid a penalty – VAT returns are due one month and 7 days after the end of the VAT quarter you are reporting. Most businesses will report VAT quarterly, although those who receive mainly refunds can apply for monthly VAT reporting. Once your VAT return is submitted you must remember to pay any VAT due by the due date which is one month and 7 days from the end of the VAT quarter you are are reporting. You can elect to pay your VAT by direct debit. The direct debit facility must be set up in advance of submitting your VAT return and several days in advance of the due date. If you elect to pay by direct debit your payment will be taken between 10th and 12th of the month giving you a few extra days grace for the money to leave your account.
Be aware of the penalties if you submit your return late or miss the payment date
If you do not submit your VAT return by the due date you may receive a surcharge. If you do not pay your VAT by the due date you may receive a surcharge. Both the VAT return and the payment must be received by the due date. A surcharge is payable in addition to the VAT due.
You will not receive a surcharge the first time you fail to submit or fail to pay on time. However if you submit late, pay late or do not pay in full on another occasion within 12 months of the first late payment or late submission you could receive a surcharge.
Businesses with a turnover greater than £150,000 will pay a surcharge of 2% of the VAT due on the 2nd default, 5% of the VAT due for their 3rd default, 10% of the VAT due for their 4th default and 15% of the VAT due for 5 or more defaults. If the surcharge due is less than £400 for the 2nd or 3rd defaults the surcharge will be waived.
Businesses with a turnover of less than £150,000 will not pay a surcharge on their 2nd default, but will pay 2% of VAT due on their 3rd default, 5% on their 4th default, 10% on their 5th default and 15% on each subsequent default. Again, if the surcharge due is less than £400 for the 3rd and 4th defaults it will be waived.
You will not receive a surcharge if your VAT return is submitted late and you are due a refund or you have no VAT to pay.
Keep your VAT records
You must keep your VAT records for six years plus the current year and if you de-register for VAT you must also keep your records for six years.
- That you save the VAT you receive on your income in a separate account – every little bit you save adds up so that you have less to find when your VAT bill is due
- That you obtain and retain all invoices and receipts for the purchases you make so that you can reclaim VAT on everything which has VAT on and is used for your business
- That you keep your accounts records up to date so you know month to month how much VAT you will have to pay when the time comes
- You keep tidy VAT records so that if the VAT Inspector requests to see your records or any of your paperwork you can find it quickly and easily.
VAT is not daunting. Growing businesses will become VAT registered at some stage so if you have a growing business get organised now so that completing your VAT return is just a small extension to your regular record keeping.