One of the first questions that new business owners ask is should they register their business for VAT. If your turnover in any 12 month period exceeds £85,000 then registration is mandatory. If it is not you may choose to register voluntarily if you wish. However, following recent changes to the VAT flat rate scheme categories, it is no longer our advice that a company automatically opts for VAT registration. You should consider this option carefully and whether the benefits in your situation are likely to outweigh the administrative cost.
What are the benefits of being registered?
There is an alternative scheme called the Flat Rate Scheme which, prior to April 2017, produced an even higher recovery of VAT. However HMRC have introduced a new category for limited cost traders, which means that in most cases the flat rate scheme no longer produces a better financial return than the standard scheme (although it does still have the advantage of being simple to operate).
Apart from the financial benefits, being registered for VAT can help promote your business, presenting an image of a large, professional and well established organisation.
How do I register?
When is VAT payable?
In what circumstances might voluntary registration not be advisable?
If the majority of your work is carried out outside the UK then there may be a limited amount of VAT on purchases and expenses incurred in the UK for you to recover. Foreign VAT incurred cannot be recovered through the UK VAT system although you can make a separate online claim for VAT incurred in EU countries (probably only worth doing if it is significant).
If you are certain your annual turnover will be below £85,000 then you might not want the additional administrative burden of recording all VAT collected and incurred, and filing quarterly returns. In addition to this, from April 2019 Making Tax Digital (MTD) will come into force, requiring all VAT registered businesses to submit their returns electronically via MTD compatible accounting software. This means that you will need to keep your software up to date at least every quarter as a minimum requirement.
Note that if you choose NOT to register for VAT, you must monitor your turnover on a rolling 12 month basis and advise us as soon as you think you may exceed £85,000, so we can apply for VAT registration. There are penalties for not doing so within 30 days.
What is the flat rate scheme?
From April 2017 we expect that the majority of our clients are likely to fall within the limited cost trader category for which the rate is 16.5% (15.5% in first year of registration). A limited cost trader is one who spends very little on qualifying goods which, for consultants, is likely to mean stationery, books and certain software (hard format not downloaded). Capital items like laptops are excluded as ‘goods’ and all services such as travel and subsistence are also excluded.
HMRC have provided the following further examples of goods that are specifically excluded:
- Accountancy fees, these are services
- Advertising costs, these are services
- An item leased/hired to your business, this counts as services, as ownership will never transfer to your business
- Food and drink for you or your staff, these are excluded goods
- Fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
- Laptop or mobile phone for use by the business, this is excluded as it is capital expenditure
- Anything provided electronically, for example a downloaded magazine, these are services
- Rent, this is a service
- Software you download, this is a service
- Software designed specifically for you (bespoke software), this is a service even if it is not
You’re a limited cost trader if the amount you spend on relevant goods including VAT is either:
- less than 2% of your VAT flat rate turnover
- greater than 2% of your VAT flat rate turnover but less than £1000 per year
If you are not a limited cost trader you can apply and use the appropriate business category rate rather than 16.5%. This assessment should be carried out on a quarterly basis and the appropriate rate applied each quarter.
If your agreed flat rate is 16.5% and you invoice your client for fees of £10,000 (plus £2,000 VAT), the VAT payable to HMRC will be £12,000 x 16.5% = £1,980.00. This means that you retain £20 of VAT.
The scheme is only available to businesses who forecast their taxable net turnover will not exceed £150,000 in the subsequent 12 months. Taxable turnover excludes VAT and supplies of services made to businesses outside the UK. Once you have joined you have to check your level of turnover each year and will usually be required to leave the scheme if this exceeds £230,000 over the past 12 months. For these purposes both VAT and supplies made to businesses outside the UK are included in the turnover calculation.
The flat rate scheme is usually not suitable if you incur a high level of VAT on expenses (perhaps because you use sub-contractors) or if most of your work is for businesses outside the UK. Comprehensive information can be found on the link below to Flat rate VAT notice 733.
Can I reclaim VAT on pre-registration expenses?
However, you could recover the VAT on a laptop purchased 2 weeks before the business was incorporated or registered for VAT, provided it was purchased specifically for the business. Any VAT recoverable on pre-incorporation expenses has to be recovered on your first VAT return and the software we use will work this out for you.
If you choose to join the flat rate scheme you can still recover any VAT incurred on pre-incorporation expenditure.
What do I need to consider if my clients are outside the UK?
There are a few exceptions to this such as services related to land and property, including architects and surveyors, and some services related to events. In these cases the place of supply is where the land is or where the event is performed. There are also special rules for telecommunications and digital services.
Are EC sales treated differently to non EC?
You need to get it right
For further advice on any aspect of VAT please contact the team at Competex.