VAT registration: Exceptions and exemptions

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There is an important difference between having an exemption from registering for VAT and enjoying an exception to being registered, as Neil Warren explains.

My article on voluntary registration and MTD prompted a few questions and comments which I will explore in greater detail here.

Exception to being registered

The VAT and MTD article considered the opportunity for a business that has exceeded the VAT registration threshold to request from HMRC an exception to being registered if it was caused by a temporary blip in sales: eg a one-off good sale that won’t be repeated. I explained that a business had to notify HMRC within 30 days of the threshold being exceeded, giving clear reasons why expected taxable sales in the next 12 months will be less than the deregistration threshold ie £83,000. If HMRC is happy, the business won’t have to join the VAT club.

Missing the window

In the real world, it might be difficult to meet the 30-day rule, as one AccountingWEB reader suggested.

Example

John is a labour-only builder who is not VAT registered, and he exceeded the registration threshold in the 12-month period to 31 March 2018 because he had a big one-off job that also involved him supplying materials. The first time that John’s accountant realised he had exceeded the limit was on 28 January 2019 (sound familiar?) when John brought in his records for his 2018 self-assessment tax return.

The good news is that John can still request an exception to being VAT registered, even though nearly 10 months have passed since he went over the threshold. This opportunity exists despite the wording of VAT Notice 700/1, para 3.7, which states: “You’ve still got to tell HMRC’s VAT registration service that you’ve exceeded the threshold within 30 days of the end of that month.”

However, the secret is not to justify the exception request on the basis of actual turnover figures achieved since March 2018, but use the known facts on 31 March 2018 as to why John knew his sales in the 12 months to 31 March 2019 would be less than £83,000. This is a subtle but important difference and the stakes are high because a bad call means that HMRC will backdate John’s registration to 1 May 2018.

See HMRC guidance in their VAT Registration Manual (VATREG19150) exception from registration: retrospective applications.

Exemption rules

If an unregistered business has an annual turnover that goes over the registration threshold but the sales are mainly or only zero-rated, it can apply to HMRC for exemption from being registered. This request is made on the basis that VAT returns will usually be repayments when they are submitted, ie input tax will exceed output tax (VAT Notice 700/1, para 3.11). The request should be made within 30 days of going over the limit, but HMRC again has the power to allow exemption retrospectively: see HMRC VAT Registration Manual (VATREG20150).

An AccountingWEB reader asked if a repayment trader such as a bookseller that is already VAT registered on a compulsory basis can ask for an exemption, and therefore deregister. His thinking was that the input tax gains his client currently enjoys by being registered will be less than the cost and worry of changing his accounting system from April 2019 to comply with MTD.

This is an important question which may be relevant to thousands of businesses, and the good news is that the answer is “yes” – see VAT Notice 700/11, para 3.2 (bullet point 3).

Deregistration – VAT on assets

Another AccountingWEB reader was keen to deregister a client before April 2019 to avoid MTD but was worried that the client would need to repay all the input tax claimed in the past on plant, machinery, stock and other assets if the items were still owned on the date of deregistration.

This analysis is not correct - the key figure is the market value of the assets on the date of deregistration, and not what they originally cost. If the total VAT due on all assets at deregistration is less than £1,000 (ie the open market value is no more than £5,000), then that VAT can be ignored as deminimis.

I recently suggested to an accountant that his client should sell some of his assets before deregistering (assuming they were not needed in his business), so that the value of those remaining was then less than £5,000 and therefore had no output tax liability on the final VAT return.

Final thought

If MTD goes well next year, it is possible that HMRC will extend the MTD regime to voluntary VAT registrations in April 2020. This suggests that the best way of escaping the MTD regime is to deregister from VAT before April 2019, or not to register in the first place. It will pay to be fully aware of the exception and exemption opportunities I have considered above.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

Replies

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By trecar
12th Sep 2018 11:26

Interesting, but what happens if exemption is applied for during the contract i.e. as soon as the accountant realised that the client had crossed the threshold and HMRC don't respond despite reminders? The client then submits the final invoice ex VAT and promptly drops below the monthly turnover threshold as business reverts to the norm. Although the client was initially at fault this then becomes aggravated by HMRC failure. I have such a case and have told the client to advise customer that VAT on the whole contract may become payable when they finally respond, but the danger is the customer may move on. and the longer time progresses the harder it will be for the client to recover the VAT from the customer. HMRC don't look good in this one as they are causing the problem.

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to trecar
13th Sep 2018 15:59

Exactly: HMRC are taking so long to reply to exemption applications (3.5 months for a recent application for a client of mine, despite regular chasing). The client was left in limbo during this time as they were nervous about invoicing customers without knowing the out come of the application. Customers were end users so could not claim VAT back if it was added on.

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14th Sep 2018 09:39

I have said it before and I will say it again, I would take the Vat threshold to £150,000 it would mean a lot of small business no longer had to worry about being registered for Vat. I know some business which turn down work so they are under the Vat limit. So it may mean the government receives less in vat but more in Corporation Tax and income tax

Though I would leave a voluntary option in place.

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