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VAT registration made simple for start-ups

VAT can be a confusing concept and many businesses fail to grasp it completely. Unfortunately, failure to understand and follow VAT rules can leave companies vulnerable to penalties.

Small businesses in particular can face considerable losses for failing to stick to the rules, and, of course, this can be incredibly damaging.

Put simply, businesses with a turnover of £83,000 from VAT-able supplies must register for VAT and have to account for VAT whenever a supply of goods and services takes place. If registration is applied for too late it can result in penalties.

When to register for VAT

Businesses can opt to register on a voluntary basis before reaching the turnover threshold. While this may seem an odd choice, as it means that VAT will be due on sales from the date of registration, it can be a good move. HM Revenue & Customs (HMRC) will allow VAT to be recovered on set-up costs relating to the intended VAT-able activities of the business so start-up businesses can end up recovering 20% of their costs as VAT before making any sales. This can be a real cash flow advantage.

The basics explained

The standard VAT rate is 20% and this is the rate that is most likely to apply for most businesses, but some items are specifically exempt, zero-rated or charged at the reduced rate of 5% VAT. It is always worth checking that you intend to charge VAT at the correct rate before starting to supply your customers.

If your business sells VAT-taxable goods or services to customers, the tax that is charged on those is referred to as "output tax". In general, most businesses factor VAT into the final price of purchase and pass the cost on to the customer. It is always worth checking before signing contracts with customers to ensure that VAT can be added on to the contract price agreed for goods/services and not deducted from it, which would result in a loss of income as part of the contract price will be lost as VAT due to HMRC.

The VAT paid to suppliers for goods and services that your business buys in is called "input tax". This covers the cost of things like raw materials, business equipment, business phone calls, those goods you plan to re-sell and payments for professional services - all extremely important factors for start-ups to consider. Businesses can claim back input VAT from HMRC on VATable supplies and business overheads.

VAT returns

Once VAT is registered, a business will pay HMRC the difference between the output tax on goods and services it has supplied less the input tax on purchases. This is usually done via quarterly VAT returns but it is possible to apply for annual or monthly VAT returns.

There are strict deadlines for payment of VAT returns; delays or non-submission can result in penalties called default surcharges. These range from an initial warning letter to penalties of 2%, 5%, 10% or 15% of the VAT due for each subsequent late return.

Registering for VAT

If sales of VAT-rated goods or services exceed the current VAT turnover threshold of £83,000 in a rolling 12-month period, your business should register for VAT. To do this, you must notify HMRC within 30 days of the end of the month in which the turnover for the last 12 months exceeded the VAT registration threshold.

In some circumstances, other rules apply. For example it is necessary to register immediately when a business has purchased the trade and assets of another business where that business purchased had a turnover above the VAT registration threshold for the 12 months prior to acquisition, so it is always worth taking advice to make sure that the correct registration date is applied for.

Registering online

It is possible to apply in writing but it is usually easier and quicker to complete the relevant VAT application forms online. It is essential that you notify HMRC within the registration deadlines, as failure to do so could prove expensive. HMRC can (and will) apply penalties for late registration that can be up to 100% of the VAT due.

The level of penalty for late registration is dependent on a number of factors such as the length of the delay in registering for VAT, whether the failure to register for VAT is deliberate and/or concealed from HMRC and whether or not the omission is disclosed to HMRC by the taxpayer. Plus, you will still have to pay HMRC the original VAT that you should have been charging customers.

The prospect of registering for VAT may seem like just another thing on a long list of jobs that start-ups need to carry out, but pushing this to the bottom of your priority list could be a costly mistake. To avoid penalties, treat this important issue as a priority and always seek professional VAT advice.

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Copyright © 2016 Tamara Habberley, senior VAT consultant, The VAT People.

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