Do You Need to Be VAT Registered?

VAT, or Value Added Tax is a tax added to most products and services sold by VAT registered businesses in the UK. Businesses have to register for VAT if their VAT taxable turnover is more than £85,000. The business can also choose to register if their turnover is less than £85,000.

Knowing when to become VAT registered with HMRC is an important step in the life cycle of any business.

Being aware of the requirements set by HMRC is an essential part of making sure your business meets all the necessary criteria and doesn’t incur fines, penalties or unexpected liabilities.

Due to the complexity of the rules, it's crucial to know the criteria to determine if you do need to register.

Key points to consider are:

Are you VAT exempt?

Only certain businesses are required to register for VAT. There are a range of goods and services that are VAT exempt and the sales from these do not count towards the VAT threshold.

It is important to understand the difference between VAT exempt and 0% VAT.

Even if there is 0% VAT on certain items, for example some foods, books and water, the sale of these still count towards as business’s VAT threshold amount. Whereas VAT exempt goods and services do not count towards your VAT threshold.

If your business is operating or providing any of the below, you will not need to register.

  • Sporting activities and physical education
  • Education and training
  • Some medical treatments
  • Financial services, insurance and investments
  • Dental practices
  • Medical practices, such as GP surgeries

This is not a full list of goods and services that are exempt - you can find the full HMRC list here.

It is worth noting that if your business is classed as exempt, you are not allowed to charge or reclaim VAT on any goods or services, even if your purchases are taxable and incur VAT charges.

Is your business turnover more than £85,000?

If your business has sales of £85,000 or more over 12 consecutive months (or 30 days if this is sooner), VAT registration is compulsory in the UK.

At this stage, the company's turnover should be monitored. As a VAT registered business, you must keep detailed records of sales, invoices and receipts so you can accurately complete your VAT returns.

If you are going to exceed the £85,000 threshold in the next 30 days, you must register by the end of those 30 days.

For example - On 1st June, you win a £95,000 contract and you are to be paid by the end of June. You must become VAT registered by 30th June. Your effective date of registration will be 1st June.

To complete the registration process, business owners will need to notify HMRC by submitting your VAT1 form online.

What is your business status?

Generally speaking, all business will fall into a set category; sole-trader, limited (including LLP & PLC), partnership or charity.

All businesses, with the exception of charities will be charged VAT based on the published VAT rates by the HMRC.

All these types of businesses are required to register for VAT if they are selling VAT taxable goods and services.

Most goods and services will have 20% VAT applied. Some good and services will have 5% VAT applied, whilst others, such as most food and children’s clothing will have 0% VAT applied.

When purchasing from VAT registered companies, charities are liable for a reduced VAT rate of 5% or 0% on some goods and services. This is known at VAT relief.

What is Voluntarily VAT Registration?

You can register voluntarily if it suits your business, for example if you buy/sell from/to other VAT - registered businesses and want to reclaim the VAT, even if your turnover is below the £85,000 threshold.

Being able to charge your customers VAT and claiming VAT refunds can be beneficial to some companies.

Keeping VAT records is a business requirement. With Making Tax Digital being a requirement for VAT registered businesses, the importance of accurate records has never been more important.

Whether you are legally required to or voluntarily register for VAT, it is very important that you keep track of your VAT liabilities and record any VAT related sales.

Knowing how much your VAT liabilities are can reduce the chances of you having a larger bill than expected.

Without accurate accounting, you are at risk of underestimating the total cost of your VAT bill. Companies that are unable to meet their VAT obligations can request a Time to Pay Agreement or take out a specialist VAT loan to pay their bill.

We are on hand to help you with any questions or finance applications. Whilst RLA Capital cannot offer financial advice, we can provide various business loans to assist with cash flow. RLA Capital would recommend speaking with your accountant if you are experiencing cash flow problems.

Updated: Feb 25, 2023