As bookkeepers for tradespeople based in Chichester, clients frequently ask us, “When should I register for VAT?” In this article, we thought we’d answer that and all your other questions about VAT in our usual jargon-free manner.
When should I register for VAT?
If you reach or know you will achieve a turnover of £90,000 (from 1 April 2024) (£85,000 at the time of writing) in 12 months, it’s time to register for VAT. This rule applies whether you operate as a Sole Trader or a Limited Company. It’s also important to know that this applies to any rolling 12-month period. It is not restricted to a financial year.
If you haven’t reached that turnover threshold, you can still register for VAT voluntarily. Indeed, if you are paying more VAT than you are charging, it could be beneficial for you to register for VAT voluntarily. Then, you can reclaim that VAT from HMRC.
Top Tips:
1: Did you know that when you first register for VAT, you can reclaim the VAT paid on any assets you still have, such as equipment, as far back as four years? You can also reclaim VAT paid on services for the previous six months. Therefore, it’s wise to keep hold of your VAT receipts from the day you start operating your business, even if you haven’t registered for VAT.
2: Whether registered for VAT or not, we suggest you take advantage of bookkeeping software, like Xero, to keep track of your financial information. That way, you can see when you might need to register for VAT, and when you do, you’ll be ready!
Pricing, invoicing, and record-keeping once you have registered for VAT:
Once you’re VAT registered, you must charge the relevant VAT rate on your goods and services. That means 20% for most, although it will vary depending on your products and services. As a VAT-registered company, you must keep your receipts, invoices and bills to evidence the VAT you charge and pay.
Luckily, some great apps can help with that. For example, Hubdoc, free with a Xero subscription, can capture electronic copies of those documents and then send them to Xero. It’s so helpful to have access to copies of all your receipts, etc, at the touch of a button. Plus, once you have an electronic copy, there’s no need to keep the pieces of paper. Remember, HMRC requires any business to keep records for the current year and the six years prior. So, it’s convenient to have the electronic copies.
You can use Xero to split out the VAT in all your sales and purchases and then calculate your VAT return each quarter. You can even submit your return directly to the HMRC through Xero.
A Word on Disaggregation:
Disaggregation is when a business owner splits their business into parts to stay under the threshold purposely. This might sound like a great idea to avoid reaching the VAT threshold, but HMRC is smart, and if they believe you’ve disaggregated to avoid tax, you could end up in trouble for tax avoidance.
There are some valid reasons for splitting a business that HMRC would find acceptable. However, you should always take professional advice or contact HMRC before making changes. If HMRC believes you should have been VAT registered, you could be guilty of Failure to Notify. Penalties for this are charged between 10% and 100% of undeclared VAT.
An example where you might disaggregate (after taking the relevant advice) is if part of your services are taxable and part is not. For example, if you were a property developer and a landlord, you would charge VAT for development activities. However, rental services are exempt, so in this case, it might be beneficial to split the two businesses.
Final Thoughts:
As bookkeepers for tradespeople based in Chichester, we often see small sole trader businesses reach the threshold, register for VAT, and then regret it.
This is often the case when they provide their services to the public rather than a business. Adding 20% VAT to their bills can price them out of the market, making it difficult to secure contracts. As a smaller business or sole trader, it’s worth considering whether to cap your income at £90,000 pa to stay under the threshold.
If you have any further questions about VAT registration, we are happy to answer them. Get in touch HERE.