Late VAT registration
Businesses trading beneath the VAT registration threshold need to constantly monitor their taxable turnover. If that turnover exceeds £85,000 (based on income received) at the end of any rolling twelve-month period the business must notify HMRC of its liability to register for VAT within 30 days of the end of that period and register for VAT from the first day of the following month. This twelve-month period does not run to calendar or financial years, businesses must calculate their total turnover for the previous twelve months at the end of every month.
Frequently, a business only becomes aware that it has breached the VAT registration threshold when the annual accounts are prepared. Calculating when the breach occurred can be a time-consuming and costly exercise as well as potentially leading to late registration penalties and paying VAT to HMRC that often cannot be recovered from past customers.
It may be possible to agree with HMRC that a business can be exceptionally excused from VAT registration, if an exceptional transaction increased turnover above the threshold temporarily. However, once the threshold has been breached it is often difficult to persuade HMRC that this was a one-off. If you are undertaking an unusual transaction that could take your business over the VAT threshold take advice in advance.
Flat rate scheme
Many smaller businesses have taken advantage of the flat rate scheme for VAT, which is a simplification allowing them to pay VAT at a fixed percentage of turnover for their trade, whilst still collecting VAT from customers.
That percentage has a built in allowance for VAT on costs based on the type of business carried out. Use of the FRS can reduce administrative costs for businesses and, in some cases, also gives a VAT benefit. As part of the scheme, businesses receive a 1% discount in their first year of VAT registration. Businesses sometimes misinterpret this to mean that they receive the discount in their first year of using the flat rate scheme. It is important to interpret and apply the rules correctly, particularly when beginning to use the scheme. Businesses should ensure they choose the correct rate and that this rate is applied to the VAT inclusive turnover figure.
All businesses should consider regularly whether the scheme still benefits them. Or are they operating in a different sector and need change their flat rate percentage? Or have they have exceeded the annual turnover under which the FRS can be used, currently £230,000?