Continuing his VAT registration series, Neil Warren considers how to deal with some practical challenges that often arise with registration.
Exception versus exemption
A problem I frequently find is that advisers often get confused about the difference between asking HMRC for an “exemption” from VAT registration and an “exception”. The common theme is that both are relevant when a business has gone over the compulsory threshold but wants to avoid being VAT registered.
Jack is a builder who usually earns about £50,000 each year and is not VAT registered. In February and March 2017, he undertook a big one-off job that included a lot of materials – he usually provides his services on a labour-only basis. He therefore exceeded the VAT threshold in the 12-month period to 31 March 2017.
Solution: assuming that Jack does not want to register for VAT (ie because his customers cannot claim input tax), he could apply to HMRC for an “exception” to being registered. This request should be made on the basis that the labour and materials job was a “one-off”.
Also in the 12 month period to 31 March 2018, he expects his total taxable sales will be less than the deregistration threshold, ie £83,000. The request for an exception should be made within 30 days of exceeding the threshold (see HMRC Notice 700/1, para 3.7).
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Jill runs a sandwich kiosk and all of her sales are cold takeaway food (zero-rated for VAT purposes). She exceeded the VAT registration threshold for the 12-month period to 30 April (taxable sales exceeding £85,000) but she has minimal input tax to claim so does not want to register if possible.
Jill could ask HMRC for an exemption on the basis that her VAT returns will be repayments, ie no tax loss to HMRC if the registration does not happen (see HMRC Notice 700/1, para 3.11).
Late registration penalties
The key point is that if a taxpayer tells HMRC about a late registration (rather than HMRC discovering it by reviewing self-assessment or corporation tax returns and checking the turnover figures), there will usually be no penalty if both of the following conditions are met:
- the late period is less than 12 months – this is defined as the period from when the business should have registered to when it actually submitted its VAT1 registration form to HMRC; and
- the taxpayer cooperates with HMRC to resolve the late period, ie dealing with correspondence promptly, answering questions about past VAT figures etc.
If a penalty is relevant (ie one or both of the conditions above do not apply), there is a potential escape route if a taxpayer had a reasonable excuse for the late registration. Blaming another person for failing to carry out a task is not a reasonable excuse.
Intending trader applications
A business is entitled to register for VAT if it has an intention to make taxable sales in the future. Contrary to common myth, there is no deadline date as to when sales must have been made before HMRC will seek to cancel the registration and disallow all previous input tax claims.
For example, if I bought some land with an intention to plant and grow apple trees, in order to sell the apples as a business venture (zero-rated), I can register for VAT as soon as I buy the land, even though my first apple sale might be ten years away.
Aborted business projects
What would be the position if a taxpayer registered for VAT with an intention to make future taxable sales, but three years down the line the taxpayer decided that his money-making idea was no longer viable and he aborted his plans completely? Would HMRC seek to disallow input tax claimed on all expenses for the last three years on the basis that no taxable sales were made? In other words, if HMRC does not get any output tax, can it deny input tax claims?
The answer is no – as long as there was a genuine business intention on the part of the taxpayer, then input tax can be claimed on related costs. See VAT Notice 706, para 13.4.
In his final article in this series, Neil will consider issues with deregistering from VAT.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.