A small business guide to registering for VAT

Customisable business insurance
11 April 2023
7 minute read

What is VAT and who pays it?

VAT, standing for Value Added Tax, is a consumption tax that's often applied to goods and services. First introduced in the UK back in 1973, today VAT is the third largest source of revenue for the Treasury behind Income Tax and National Insurance.

While the economic burden of paying VAT falls on consumers, it’s the sellers of products and services who actually pay the tax to the government, after adding it to the prices they charge.

The standard rate of VAT in the UK is 20%, but certain goods and services qualify for a reduced rate of 5% or even 0% (but still have to be declared), while some are exempt from the process entirely.

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Who has to register for VAT?

In simple terms, any UK business with a taxable turnover of £85,000 or more in any given tax year must register for, and pay, VAT. As of 2021, the FSB estimated that 2.7 million businesses in the UK’s private sector are registered for VAT, or 48% of the estimated total population.

If you reach the end of a month in which your business’ turnover for the last 12 months exceeds the £85,000 threshold, then you have one further month in which to register for VAT with HMRC. Don’t worry, the process is relatively simple for most businesses and we go into more depth on how to register later on.

Overseas businesses supplying the UK market

Regardless of whether your business has a turnover of over £85,000 or not, there is a circumstance in which you are still legally obliged to register for VAT. You must register for VAT if all of the following statements apply to you:

  • You (the business owners) are based outside the UK
  • Your business is based outside the UK
  • You supply any goods or services to the UK (or expect to in the next 30 days)

Businesses with a taxable turnover below £85,000 per year

Any UK business (except those exclusively selling VAT-exempt products) can voluntarily register for VAT, even if their turnover is below the £85,000 threshold. But why would you want to? And how do you know if it's the right decision for your business?

Pros of voluntary VAT registration include:

  • Registered businesses can claim back VAT spent on business expenses
  • If you’re almost at the turnover threshold, you can avoid accidentally missing the deadline to register

Cons of voluntary VAT registration include:

  • By registering for VAT, you will have to process the VAT applicable to each and every sale made by your online retailer company
  • You might add the VAT amount to your prices, becoming less competitive

Laurie Tweedale, Management Accountant at Countingup, says:

Picture the scene, your business operates below the £85,000 turnover threshold but you’re wondering whether or not you should voluntarily register your business for VAT. You should start by looking at how much VAT you pay on things like raw materials, running costs and general overheads.

VAT works both ways. If the amount of VAT you pay on your business expenses is greater than the amount of VAT you charge your customers, it might be in your favour to register. Remember that once your business is VAT registered, you can claim back the VAT you have paid on your business expenses and could find yourself in line for a refund from HMRC.

Exemptions for businesses only temporarily breaching the threshold

If your business does not normally have a turnover above £85,000 per year but may temporarily breach the threshold before dropping back down, you can apply to HMRC for special exemption from VAT registration.

How to register for VAT

Businesses can register for VAT online in the vast majority of cases. However, there are certain circumstances in which you’ll need to register offline, by post, specifically when:

  • Applying for a VAT registration exemption
  • Registering multiple business units under different VAT numbers
  • Joining the Agricultural Flat Rate Scheme.

Also, you can opt to register your business yourself, or to hire an accountant to register their business for you.

To register for VAT with HMRC, you will need the following:

  • Your business’ contact details (address and phone number)
  • Your business bank account details
  • Unique Tax Reference (UTR) number
  • Details of your turnover and the nature of your business
  • Your Government Gateway ID and password

How long does it take to register?

The registration process is relatively quick and simple, but HMRC can take up to a month to process your registration and send you your VAT certificate (though they aim to process 70% of registrations within 10 days).

When you receive your VAT certificate, it will act as proof of your VAT status and contain:

  • Your VAT number (which you need to put on all invoices)
  • Details of your first VAT return
  • Your effective date of VAT registration (when you were registered from, not when you received your certificate)

You can always view your VAT certificate online via your HMRC account, accessed through your Government Gateway login.

What accounting system do businesses need to use for VAT?

There are four types of accounting method that your business could use for your VAT obligations:

  1. Standard VAT accounting – This is what most businesses use and means that you record the VAT you collect for each sale and the VAT you paid for each purchase. You then submit a VAT return to HMRC every quarter.
  2. Annual VAT accounting – Some businesses can submit a VAT return once a year, but crucially you must still pay quarterly and each quarterly payment is either an estimate or based on your last return.
  3. A flat-rate scheme – Some small businesses avoid accounting altogether and simply pay a percentage of their turnover as VAT. An accountant will be able to advise you if you are eligible for this and whether or not it would be a good option for your business.
  4. The cash accounting system – If you opt to use cash basis accounting, you’re assumed to have collected or paid VAT when money changes hands, rather than the point at which the invoice is raised.

What about Making Tax Digital?

The UK is currently in a period of transition towards a fully digitised tax system (known as Making Tax Digital, or MTD). This means that all VAT-registered businesses are required to keep digital records of all transactions and submit VAT returns using software.

You can use a government service to search for Making Tax Digital-compliant software for VAT.

What if you fail to register for VAT?

Because VAT registration is a legal requirement for any business with a turnover of more than £85,000, there is a system of penalties in place for any company or sole trader operating above the threshold that doesn’t register. This is calculated as a percentage of the VAT owed by the business to HMRC, and increases over time.

Period of lateness Fine as % of VAT due
Up to 9 months late 5%
Between 9 and 18 months late 10%
Over 18 months late 15%

Intentional non-registration

While the majority of instances of businesses not registering for VAT when they should are unintentional and the result of oversight, if you intentionally do not register your business for VAT when you are above the £85,000 threshold, you may be committing a criminal offense. If found guilty of intentional or fraudulent VAT evasion, you could face up to 7 years in prison.

Exemptions from VAT registration

Exempt vs zero-rated

One of the more complex issues for a business when working out whether or not they need to register for VAT is the slightly confusing distinction between zero-rated and exempt products and services.

  • Zero-rated products and services are taxable, but have a VAT rate of 0%. You must still declare these in your VAT return, but will pay no VAT on their sale.
  • Exempt products and services do not need to be included in a VAT return and are not taxable. If your business only sells these products and services, you cannot register for VAT.

Exempt products and services

Businesses that exclusively sell products and services that are fully exempt from VAT are not able to register. These products and services include:

  • Insurance, finance and credit
  • Education and training
  • Charitable fundraising events
  • Subscriptions to membership organisations
  • The selling, leasing and letting of commercial land and buildings
  • Lottery ticket sales, betting and gambling
  • Antiques
  • Burials or cremation
  • Education services
  • Parking

Zero-rated products and services

There are a considerable number of products and services that are zero-rated and they are too numerous to list in one article. However, you can see which products are exempt, zero-rated or standard-rated on HMRC’s website.

Examples of zero-rated products and services include:

  • Charity advertisements
  • Charity shops that sell donated goods
  • Building services and equipment for disabled people
  • Water for households
  • The sale of a new dwelling with a garage or parking space
  • Magazines and newspapers
  • Children’s clothing and footwear

It is a common misconception that most food and drink is exempt from VAT. In reality, most food and drink for human consumption is zero-rated, with certain luxury or unhealthy foodstuffs charged at the standard rate.

Transferring or changing your VAT registration

Changing your details

By law, you must tell HMRC within 30 days of any changes to your:

  • Name, trading name or main address of your business
  • Accountant or agent who deals with your VAT (if applicable)
  • Members of a partnership, or the name or home addresses of any of the partners

If you change your business bank account, you must tell HMRC 14 days prior to the change of accounts.

Canceling VAT registration

If you are no longer eligible for VAT registration, then you must let HMRC know within 30 days or risk a fine.

This will usually be either if your business ceases trading or you stop selling VAT taxable sales.

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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.

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