In the first of a four-part series, Neil Warren considers some practical situations when a business must register for VAT.
Despite the fact that the VAT registration rules have largely been unchanged for over 40 years, they still cause problems for clients, often leading to penalties and assessments from HMRC.
The historic test
Most tax advisers are aware that a business needs to register for VAT when taxable sales have exceeded the relevant threshold on a rolling twelve-month basis (£85,000 since 1 April 2017). The date of VAT registration is the first day of the second month after the threshold has been exceeded. A business whose turnover tips over the threshold on 30 April 2017 will need to register for VAT on 1 June 2017.
Tip: don’t forget that zero-rated sales are included in the figure of “taxable sales” as well as any sales that would be subject to 5% or 20% VAT. But sales that are either exempt or outside the scope of VAT are ignored. See Example 1.
Daniel is an author who writes for two publishers: a UK based magazine (annual fees are £70,000) and a magazine based in Rome (annual fees are £30,000).
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The income from the Italian magazine is outside the scope of UK VAT – the place of supply is Italy where the customer is based, under the general business to business (B2B) rule. Daniel’s relevant income as far as the UK VAT threshold is concerned is £70,000. He doesn’t have to worry about Italian VAT because the publisher will account for Italian VAT on his own return in Italy by doing a reverse charge calculation.
The forward-looking test
A second important VAT registration test is the ‘forward-looking’ test, i.e. a business needs to register if it expects taxable sales to exceed the threshold in the next 30 days. The registration date is the beginning of the 30 day period. A planning point for some traders is to spread the value of a one off big job across a longer period, i.e. creating a series of individual tax points. See Example 2.
John is a builder with annual sales of £25,000 and is not VAT registered. He is about to start a major extension job for £90,000 including labour and materials which will take three months to complete. It would make sense from both a commercial and VAT perspective for John to invoice the client and receive interim payments at the end of each month for £30,000. This means his expected sales in the next 30 days will never exceed £85,000, which would be the case if he raised a single invoice and received a single payment at the end of the job. However, John will still need to check that he has not exceeded the limits for the historic test at the end of each month.
Other situations when a business must register
Services bought from abroad
I dealt with an unfortunate situation a couple of years ago where a computer business had annual sales of £80,000 and was neither registered for VAT nor wanted to be registered. However, it was also buying in software services from India with a value of about £15,000 each year. Under a bizarre twist to the VAT registration rules, a business needs to treat payments to overseas suppliers for taxable services (both EU and non-EU suppliers) as part of its taxable turnover, if the service in question would be subject to the reverse charge if the UK business was registered for VAT (in reality this is the majority of services). So this particular business had annual taxable sales of £95,000, i.e. greater than the VAT registration threshold. It should have registered for VAT three years ago.
Acquisitions of goods from EU suppliers
If a UK business buys goods from EU suppliers, where the total value of the purchases exceeds the registration threshold on a calendar year basis, then it must register for UK VAT once the threshold has been exceeded. The limits are checked at the end of each month and the registration date is the first day of the second month after the limit has been exceeded. (VAT Notice 700/1, section 7). See Example 3.
Buying a business as a going concern
In another twist, the buyer of a business acquired as going concern needs to treat the seller’s taxable sales as his own. This usually means VAT registration is needed by the new owner from the first day of trading. (VAT Notice 700/1, para 3.8).
Insurance Brokers Ltd has annual sales of £2 million, but is not VAT registered because all of its sales are exempt from VAT. It buys all of its computers from Malta and its stationery from Luxembourg. If the total value of these purchases exceeds £85,000 on a calendar year basis, it will need to register for VAT in the UK.
Once Insurance Brokers Ltd is registered for VAT, the company will not pay Maltese or Luxembourg VAT on the goods, but will instead account for acquisition tax in Box 2 of its UK VAT returns. It will not claim the same figure as input tax in Box 4 (as would be the case for most businesses, producing a nil VAT payment) because the goods relate to its exempt activities, i.e. input tax is blocked under the rules of partial exemption.