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When Should I Register for VAT?

Most businesses make what are known as ‘taxable supplies’. You have to register for VAT in certain circumstances, usually when your income above a particular level. You can also decide whether to voluntarily register your business. In this guide, I’ll answer the question ‘when should I register for VAT?’.  

Aside from the small number of businesses that are VAT exempt and so cannot register for VAT. For the vast amount of businesses there are three scenarios to consider:

  • When you must register for VAT;
  • When you don’t have to register, but it makes commercial sense; and
  • When your turnover is approaching the VAT threshold and you have to decide whether to register to be compliant with the law, or make less money to keep your business below the VAT registration limit.

Not all supplies are ‘taxable’ – insurance commissions and medical services, for example, fall outside of the scope of VAT and some are ‘exempt’. Some supplies are ‘taxable’ but charged at a lower rate. For example, the supply of domestic heating has VAT charged at 5%. VAT is charged on books and magazines but at 0% (zero rated supplies).

When You Must Register for VAT

If your taxable supplies are more than the VAT registration threshold of £85,000 (from 1 April 2017) you are required to register for VAT and account for tax on your supplies. The £85,000 threshold applies over a twelve month rolling period. This is not a fixed period like the tax year, calendar year or even your accounting year, it is any period of twelve consecutive months. The ‘standard rate’ of VAT is 20%. There is a ‘deregistration threshold’ of £83,000.

VAT is compulsuary if you make taxable supplies over this threshold, so if you are getting close to it, it is a good idea to keep a ‘rolling total’ of your turnover. You need to it up for each twelve month period, for example January to December, then February to January, and so on. Once required to register, you have 30 days to notify HMRC of your need for VAT registration.

VAT is either added to, or forms a part of your turnover, and you pay this over to HMRC after deducting VAT you yourself have been charged on business supplies. If your customer is a business, they can usually reclaim this VAT, and so neither you nor they are any better or worse off. If your customer is the end consumer, they can’t reclaim this VAT. This VAT becomes a cost to your business; you become a tax collector for the government.

HMRC operate ‘shadow economy’ teams and analyse information from your personal and corporation tax returns in an effort to counteract VAT evasion. The penalties for failure to register can be high, in excess of the ‘culpable tax’, so it’s a good idea to stay on top of your turnover figures. You must apply for registration as soon as it appears likely you’ll be over the registration threshold in the next 30 days.

When You Don’t Have To Register For VAT But It Makes Commercial Sense

When you charge VAT to your customers, they can only reclaim this VAT against their supplies if they themselves are a VAT registered business. This means that if your customers are consumers, for example the general public, or ‘exempt’ businesses, like doctors, the VAT you charge will be a cost to your customer.

What this means is that when you become VAT registered, either you, your customer, or both of you, will be bearing the burden of the tax. If you can pass this cost on without pricing yourself out of the market, your business will not be affected by this decision. If, as is likely, you won’t be able to pass this full cost on, then you’ll need to change your prices to reflect this.

When it makes no sense to register for VAT

Suppose you are a mobile hairdresser who turns over £15,000 a year. If you are not VAT registered, then that turnover all belongs to you (apart from the tax and national insurance on your profits).

The effect of registering for VAT is that this £15,000 is treated as being inclusive of VAT that has been charged at 20%, meaning one sixth (yes, one sixth) of the £15,000, or £2,500, is ‘output tax’ which you have to hand over to HMRC. Your income is therefore £15,000 less the £2,500 which is £12,500.

As your customer is the consumer, or end user, they cannot reclaim this VAT themselves so you cannot put up your prices to compensate for this. Although you can reclaim the VAT on your costs, for example hair dressing supplies and accountancy, the amount of VAT you can reclaim (that you have been charged by other businesses) is going to be insignificant.

Thus, for small businesses where your customer is not a business that can reclaim VAT, voluntary VAT registration can damage your business’s health.

When it makes sense to register for VAT

As you can reclaim the ‘input tax’ on expenses, it is often a good idea to register for VAT if your customer base comprises other VAT registered businesses. You can pass on the VAT you have to charge to your customers, who will themselves reclaim it, and you in turn can reclaim the VAT you are charged.

On a commercial note, your being VAT registered can lead the customer to believe your business is bigger than it Is in reality. Being established is an important way to win confidence. VAT registration will show the customer you’re above board and established.

If your business is ‘zero rated’ for example you earn your income from sales of printed materials or food (not hot take-away food, which is subject to different rules) there is VAT to pass on to the customer. The benefit is that you will be able to reclaim the VAT on your costs, which improves your bottom line.

When You Have To Make Less To Earn More

Imagine you have a business selling clothes to the public, and your turnover for the last eleven months is £84,000. If you take just £1,000 more, you will be liable to register for VAT and have to charge VAT from the time you were required to register. You can only deregister if your turnover in the twelve month rolling period is less than £83,000, so registration and a quick deregistration may not be a viable option. What does this mean for you?

As you sell to the general public, you cannot pass on the VAT you have to pay to your customers, because you price competitively. Although you are charged VAT by your suppliers, you make enough profit on what you sell to make say a 50% profit margin while you are not VAT registered. The effect of having to register for VAT means you have to pay over more VAT than you can reclaim.

This means you will have to ‘absorb’ the VAT yourself and, in this example, your business is £7,083 worse off. If your turnover had no related supplies to offset your VAT, the cost to you could be £14,166. Ouch.

The lesson to take from this is there are circumstances where you may have to think carefully about what you are doing with your business and whether avoiding VAT registration through a self-imposed hiatus is something you may wish to consider; if your income falls below the threshold, you don’t have to register.

In Summary…

  • When your turnover is more than £85,000 in a twelve month rolling period, you are obliged to register for VAT. You have 30 days to notify HMRC of this;
  • Watch your turnover, if you go above the VAT registration threshold, registration is compulsory. There may be occasions when you wish to avoid going over the registration threshold, because if your customer base is the public you will end up footing the bill;
  • If you are a business that makes supplies to other businesses or are a business that makes ‘zero rated’ supplies, consider voluntary registration. Consider how VAT registration affects the perception of your business to your customers;
  • If you are a small standard rated business serving the general public, VAT registration should be avoided unless your turnover is at or above the compulsuary registration threshold.

This is a general overview of a complex area. Nothing in here constitutes advice although the information in here is to our best knowledge and belief. If you have any questions you’re welcome to drop me an email Miranda@MJY-CA.com.

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Simplified Business Expenses and How to Claim Them

In my earlier post on ‘Simple Sole Trader and Tax Accounts‘ I explained how important it is to keep good records of your business expenses. Sole traders and partnerships (with no corporate partners) can claim what are known as ‘flat rate’ expenses, if you so wish. You don’t have to claim these, but the option is there. Remember, you will still need to keep records to justify your income and any other expenses.

Flat rate expenses can be claimed for:

  • Business cost for vehicles;
  • Working from home; and
  • Living in your business premises.

Remember, you cannot claim expenses twice. So if you are already claiming capital allowances on a motor vehicle, or for the travelling costs already, you cannot claim these again using the flat rate scheme.

Cars and Goods Vehicles

Yoi can claim a flat rate mileage allowance as follows, remember you will need to keep a record of the journeys you make, as well as your mileage reading at the start and end of your accounting year. (As is often the case, ‘simple’ is a relative concept!).

You may claim mileage as follows:

  • Cars and goods vehicles, 45p per mile for the first 10,000 miles; then
  • For mileage over 10,000 miles, 25p per mile.
  • Motorcycles have a flat rate of 24p per mile.

So, if you travel 12,000 business miles a year in your car, you claim:

  • 10,000 miles at 45p a mile, £4,500; and
  • 2,000 miles at 25p a mile, £500.
  • This gives a flat rate claim in your accounts of £5,000.

If you use more than one vehicle, for example a car and a van, you can use different methods for each vehicle, say the flat rate expenses for the car and the actual costs for the van. What you can’t do is chop and change; you have to stick with whatever method you use for each vehicle.

Working from Home

If you work 25 hours or more a month from home, you can claim a monthly flat rate. This rate excludes telephone and internet access, which you claim separately based on the business proportion of the actual cost:

  • 25-50 business hours a month, £10/month;
  • 51-100 business hours a month, £18/momth; and
  • 100 or more hours a month, £26/month.

You work out the hours for each month, so say January to October you worked 30 hours a month from home, then November 60 hours and December 125 hours, you’d claim:

  • January to October, 10 months at £10/month is £100;
  • November, £18 and December, £26;
  • Total £100+£18+£26 comes to £144.

The maximum claim is £312 for the year.

Living at Your Business Premises

This final ‘flat rate’ method is less common, applying to guest houses, bed and breakfasts and small care homes, where you are using your home as your business premises. This is more a method of finding the ‘private use’ proportion of the business expenses, rather than an expense claim in itself.

First, journey work out all your actual expenses as normal. What you then do, is deduct an amount from the expenses to reflect the number of people, including yourself, who live at the business premises as follows:

  • One person, £350 a month flat rate;
  • Two people, £500 a month flat rate; and
  • Three of more people, £650 a month flat rate.

So, you work out your expenses as normal, and then deduct from these costs an amount to reflect who lived with you throughout the year.

As an an example, suppose the business expenses of the guest house you and your partner run were £21,000 for the year. As there are two of you, for the full year, you will have to deduct 12 months at £500, which is £6,000 from these expenses, so claiming £15,000 for the year. If the other person is there only part of the year, you can work this out ‘pro-rate’.

So, in the example above if your partner joined you half way through the year for six months, your calculation would be 6 at £350 plus 6 at £500, £2,100 plus £3,000 is £5,100. Assuming expenses were £21,000, you claim £21,000 less £5,100 which is £15,900.

There are some circumstances where these flat rate expense allowances sell you short. HMRC have produced a handy interactive guide to help you check if simplified expenses work for your business. Of course, if you have any questions you’re welcome to drop me an email Miranda@MJY-CA.com.

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Thinking of Working for Yourself?

People decide to work for themselves for many reasons. Some have a big idea, and seek finance, staff and premises to help them to make their big idea reality. Others may turn a hobby into a modest source of extra income, for example by buying and selling goods on eBay, or making money selling bought stock at car boot sales.

Many trades or professions can allow you to work for yourself, either as a full-time occupation or in your spare time, giving control over how much time you spend working and how much money you can earn. Whatever it is you decide to do, you will likely need help from a professional accountant and tax adviser, which is where we come in.

I love talking with people about their big, small and interesting ideas. As well as helping you understand your obligations to register your business with HMRC, I will talk you through the best vehicle for your business (sole trader, partnership, limited liability company or partnership) and advise you on your other obligations, for example insurance, data protection and health and safety risk assessments.

Most of these obligations are easy to comply with online and can be done by yourself with only the statutory annual fee to find, for example with Data Protection. Others are more detailed, insurance is itself a complex and complicated area and requires specialised advice. I will always be happy to advise you on your need to hold insurance, and assist you in preparing proposal forms and reviewing any quotes you may source.

There are different legal forms of business, for example sole traders, limited companies and partnerships. The format your business should take is generally dependent on size, for small amounts of income and expenditure the sole trader is the easiest format to manage.

If you are to have many employees and the business is to be large, or you need the benefit of limited liability, then the limited liability company many be most appropriate. These have different tax and accounts filing deadlines and rules for how the business owner is taxed. The documents you have to file will be more detailed and your record keeping will need to be better.

I will always help you to identify the best and most cost-effective solution for your requirements. To find out how I can help you or your business, please drop me an email Miranda@MJY-CA.com.

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Simple Sole Trader and Tax Accounts

The simplest accounts are just a single piece of paper with income, expenditure and profit. These simplest accounts are best for small sole traders with income of less than £80,000 and no need to account for stocks or debtors.

These accounts, which would form the basis of your self-assessment tax return, are quick and easy to prepare if you have done much of the ground work yourself, like keeping a list of invoices or sales, and working out what your expenses are.

Some people manage this with a notebook, others prefer to use a spreadsheet. Either way, I will help you to find out what works best for you, and even show you how to use a spreadsheet if necessary. I will also help you work out the best system to help me to use these records as the basis for preparing your income and expenditure account, and tax return.

There is a benefit to you of keeping your own books, in that you will have a good idea of how much money you’re taking and spending, which makes it easier to manage your own finances and plan for the tax bill when it arrives, or keep track of your income to see if you are close to the VAT registration limit (£85,000) or the deregistration limit (£83,000).

The secret to good administration is organisation. If you are able to update your records monthly or even weekly, it will make both your life and my job easier: there’s nothing worse than having to hunt for missing receipts, reconstructing records of cash you’ve taken or anguishing over the money you were sure you spent but can’t tie to an invoice. 

It is important that you can demonstrate your reported income is complete and that your expenditure can be evidenced. If you keep on top of your record keeping and can demonstrate that you take your responsibility to keep proper books and records seriously, this will significantly reduce the risk of problems should HMRC review your tax return. 

Remember, your accounts will not only be needed for HMRC, you may wish to buy your own home or borrow money for something else, these accounts will help you to demonstrate you are able to afford the borrowing you are proposing. If your records are up to date, you can give the lenders and their underwriters better information quicker, especially if you are seeking to borrow more money because your business has grown since the last time you had your accounts prepared. 

Of course, electronic record keeping with a spreadsheet or even a Google Sheet you can share with your accountant is the best and most convenient way for many people to keep their books (you can also update these ‘on the fly’ with your smartphone or tablet!) however many people will carry round a notebook, writing everything down. Really, it’s whatever is best for you. 

These types of accounts work best for very small businesses, for example:

  • Taxi drivers;
  • Window cleaners;
  • Hair dressers (who ‘rent’ a chair);
  • Bookkeepers;
  • Small eBay traders;
  • Music or academic tutors; and
  • Many more!

Once you have nailed keeping simple records, it’s easy to evolve your system as your business grows. 

To find out how I can help you or your business, please drop me an email Miranda@MJY-CA.com.