ATXP6 UK
Syllabus A6. Value Added Tax A6a. The VAT registration requirements

A6a. VAT Registration - Compulsory and Voluntary

Syllabus A6a)

The VAT registration requirements

When is it compulsory to register for VAT?

When your sales (excluding VAT) go over the registration limit (£85,000).

There are 2 separate tests for compulsory registration:

  1. Historic Turnover

  2. Future Prospects

When you satisfy both tests HMRC (HM Revenue and Customs) will use the test that gives the earlier registration date.

Historic Turnover test

At the end of every month check to see if the last 12 month sales were over £85,000.

If so, you have 30 days to tell HMRC (30 days of the end of the month in which the limit is exceeded)

You are then registered for VAT from the end of the next month (or earlier if agreed)

  • So let’s say the limit was exceeded in April

  • You must notify HMRC by 30th May (within 30 days of the end of the month - April)

  • You will be registered for VAT from 1st June

Illustration 1

Year ended 31st December.
Sales were £96,000 (accrued evenly). 

When would we become VAT registered?

  • Answer

    96,000 / 12  = 8,000 per month

    So limit is reached 85,000 / 8,000 = 10.63 months (October)

    So tell HMRC by 30th November and will be registered for VAT from 1st December

Future Prospects test

If you think the limit (£85,000) will be reached in the next 30 days alone

  • then you have 30 days to tell HMRC and

  • registration starts at the beginning of the 30 days you expect to reach the limit

  • For example:

    On 1 July, the company signed a contract valued at £100,000 for completion during July.

    The company will register for VAT from 1 July and have to notify HMRC by 30 July.

Illustration 2

Guy starts to trade and in the year ended 31st December sales are expected to be £240,000 (accrued evenly). 

When would we become VAT registered?

  • Answer

    using the historic test because the threshold is not £85,000 in one 30 day period alone.

    240,000 / 12  = 20,000 per month

    85,000 / 20,000 = 4.25 month (April)

    So limit is expected to be reached in the fourth month (April)

    So tell HMRC by 30th May and registration starts on 1st June

    Note: although the historic test tells us to look back 12 months, when someone starts to trade you look back after every month as they may need to be registered before 12 months have gone by.

Illustration 3

The budgeted turnover of Shobha Ltd. in the first 9 months is £810,000.

The company starts trade on the 1st of July.

When must the company register for VAT?

Solution - using the future test as the threshold is exceeded in one 30 day period alone

£810 000 / 9 = £90 000 per month
Therefore, the limit would be crossed in the first month of operation (July).
HMRC will need to be notified by 30th July (within 30 days).
Registration will be effective from 01/07 (the beginning of the 30 day period).

De-registration

  • A trader stops being liable to VAT registration when it ceases to make taxable supplies. 

    The trader must notify HMRC within 30 days and will be de-registered from the date of cessation or from an earlier agreed date.

  • A trader may also deregister for VAT when its expected taxable turnover in the next 12 months is expected to fall below £83,000.

    The trader may de-register for VAT if they consider this beneficial.

Illustration:

A company has been VAT registered for many years, however it has recently faced financial difficulties and sales for the year ended 31/12/2018 are forecast to be £60,000.

  • Can the company de-register for VAT?

    When will the de-registration be applicable?

Solution:

The company can request HMRC to cancel its registration because its taxable supplies for the next 12 months are below £83,000.

The de-registration will be effective from the date on which the request is made or from an earlier agreed date.

VAT implications on selling a business (de-registering permanently)

General Rule

  • When a business is sold, it will cease to be registered for VAT. 

    The sale of the business is assumed to be a taxable supply for VAT purposes. 

    Therefore, all of the assets, such as plant, equipment and trading inventory owned by the business, will need to have output tax payable on them when the business is sold. 

    An exception is made if the VAT due is less than or equal to £1,000. In this situation, VAT will not be payable.

  • Illustration

    Cow plc. was being sold in the year ended 31/03/2019.

    It owned plant and equipment costing £1,200,000 (VAT inclusive) and had inventory remaining that cost £120,000 (VAT inclusive). 

    All of the input VAT on the inventory had been claimed in previous VAT returns. 

    How much output VAT will be payable on the sale of this business assuming the plant and inventory are sold for cost?

  • Solution

    VAT payable
    Plant and machinery £1,200,000 * 1/6  = £200,000
    Inventory £120,000 * 1/6                       = £20,000

    Total VAT payable                                = £220,000

Exception to general rule (where the sale is not treated as a taxable supply)

If the business disposes of its assets and trade as a going concern, no output VAT will be charged as it will be outside the scope of VAT if the following conditions are met.

The conditions for this treatment are:

  1. The business is transferred as a going concern

  2. No significant break in trading

  3. The same type of trade is pursued by the transferee

  4. The transferee is or will become VAT registered

Voluntary registration for VAT

Even if someone is not required to register for VAT, once they are making taxable supplies, they are allowed to.

For example, if a company makes zero rated supplies, they are not required to register for VAT, but they are allowed to do so.

Advantages of voluntary registration:

  1. Avoids late registration penalties.

  2. Can recover input tax on supplies.

  3. Disguises a small company to look big. (Investors may be apprehensive to invest in a small company).

  4. If a company makes zero rated supplies and standard rated purchases, then the company will be eligible for repayments from HMRC.

Disadvantages of voluntary registration:

  1. VAT added to the selling price will make an item more expensive for a final consumer who is not VAT registered, and therefore reduce competitive advantage of the business.

  2. If the trader wants to remain competitive and still be VAT registered, then the profits of the trader will suffer as they will have to suffer the output VAT payments on their own, they cannot pass them on to the final consumer.

Illustration:

Villa sells furniture, a taxable supply. Her taxable turnover for the previous 12 months is £68,000 and standard rated purchases are £45,000 (vat inclusive). 

Villa sells to final consumers who are not VAT registered.

  • Competition is high and most traders in this field are not VAT registered, therefore, Villa cannot increase her prices. If she does, customers will go elsewhere.

  • Is it beneficial for Villa to register for VAT or not?

Solution:

Profit without registering:

Sales revenue  £68,000
Purchases (£45,000)
Gross profit £23,000

  • Profit after registration:

    Sales revenue  £68,000
    Purchases (£45,000)
    Gross profit £23,000
    Less VAT paid (£3,833) (W1)
    Net profit £19,167

  • W1:

    VAT payable: 20/120 * £68,000  = £11,333
    VAT receivable: 20/120 * £45,000  = (£7,500)
    Net VAT payable          = £3,833