This is a common occurrence with all types of businesses whether you have not long started or have been trading for several years. As the owner your focus is often on marketing your business, making sure revenue is coming in so bills can be paid, and legislation such as the VAT threshold can easily be overlooked, especially if you don’t understand the VAT rules around when you ‘must’ register.
At MJB Avanti we have helped many clients who have been in this scenario, from those who went over the threshold in the last month to others who did not realise for over a year, until we completed their year end accounts and had to advise them.
We have recently been helping a client who was in this position. Upon completing the year-end accounts, from bookkeeping completed by the client we established that had exceeded the VAT threshold. The first thing was to establish ‘exactly’ when they went over the threshold. In this case, it was over a year. Once the date of exceeding threshold had been established the next job was to register for VAT. The registration must be back dated to when you went over, do NOT be tempted to only register from when you find out. HMRC may investigate and if they find you went over prior to the date you are registering they will want the VAT paid and there may be hefty fines.
Once registered, the next stage is to start submitting all the back VAT. In this case, the client did all their own bookwork, so our job was to complete all the VAT returns. Making sure not only was all the income declared, but all vatable purchases were included. With the assistance of HMRC we were able to submit one manual VAT return to cover all the back dated returns and under the new MTD (Making Tax Digital), once we had the VAT returns up to date in the accounting software, they were able to realign the returns so all future returns could be submitted digitally.
Points to remember if you find yourself in this situation:
- Check the current VAT threshold
- This is calculated on a rolling 12 month turnover (not the financial year, tax year, but rolling 12 months)
- Voluntarily register, as soon as you realise.
- Back date registration to the point of going over the threshold
- You may get investigated and have to pay fines/interest, but it will be less if you volunteer than if they find out!
- Get help from MJB Avanti – VAT is a complicated tax and has many rules around what can and can’t be claimed. Let us help you make sure its correct!
ww.gov.uk/government/publications/vat-notice-7001-should-i-be-registered-for-vat/vat-notice-7001-should-i-be-registered-for-vat#errors-late-notification-fraud
Here are some further questions we often get asked about VAT.
Can I claim VAT on purchases from before registration?
When you register and complete your first return you can claim certain items but there is a time limit depending on the item.
- 4 years for capital expenditure you still retain. For example computer equipment.
- 6 months for services you still use (eg phone line, but not phone calls)
These purchases must relate to the business or business purpose and you must keep records, such as invoices or details of the purchase should HMRC investigate.
What if I go over the threshold but it is only temporary?
If your turnover goes over the VAT threshold, but you know this is only a one-off event then you can ask HMRC for a VAT exception. This needs to be done in writing within 30 days of the date you went over and you must provide evidence that you will not go over again within the next 12 months. HMRC will then confirm if they agree to an exception or if they require you to register.
What about late submission or late payment?
The penalties for late submission will depend on your turnover and how many previous late submissions you have had in the last 12 months. For every late submission or payment HMRC will record a ‘default’
The penalty, known as a surcharge, is based on a percentage of the VAT due for that quarter. If the value of the return is unknown to HMRC they will make an estimate for the surcharge.
HMRC will not issue a surcharge on the first late return but you will enter into a surcharge period of 12 month, during this period if you default again the following will apply.
What if I make an error on my return?
If you make a minor error on your return, don’t worry this can easily be corrected on the next return but if the value of the error exceeds £10,000 of 1% of your box 6 figure of the VAT return (sales revenue) then you will need to report this to HMRC, using a notification of error form VAT652.
When I register do I start charging VAT straight away?
You have to advise HMRC when you want to be registered from. But you cannot show VAT on your sales invoices until you have a VAT number.
Say you register 1st May. But you don’t hear back from HMRC straight away and need to do an invoice on 2nd May. Do that invoice with VAT included within the Gross amount – just don’t split out on the invoice Net / VAT / Gross amounts – and state on your invoice VAT NUMBER PENDING. When your VAT number does arrive (which is usually quick) you can re-do the invoice – now showing your VAT number and splitting your Net/ VAT / Gross figures on the invoice.
NB: If you have an invoice dated pre-registration but the payment comes in after VAT registration you don’t have to declare any VAT on that invoice.
How do I de-register?
Check the threshold to de-register for VAT, which is lower than the registration threshold. You can only de-register if your business is ceasing to trade or your turnover has decreased and will remain below the threshold for the next 12 months.
You can de-register using you online VAT account, once submitted you should continue to record transactions until you have had confirmation from HMRC that de-registration has been accepted. You will also be required to complete a final VAT return from the beginning of the latest VAT period you are in until the de-registration date. This date could be different from your usual deadline so make a note so you don’t miss it!
Tips for making VAT easier
- Do your bookkeeping on regular basis, at least monthly. By monitoring your sales income you will know when you are getting near to the threshold and will be able to register in good time.
- Use an accounting software which will easily produce reports for you keep track of your business. If you are VAT registered you need to use a software that can produce VAT returns and link to HMRC to submit your returns digitally (MTD). There are many cloud-based accounting software’s which allow you integrate with your bank account to download data allowing you reconcile your account easily. If you need help on choosing a software talk to a member of the MJB Avanti team, we have experience in different software.
- If you are new to VAT and worry about paying the bill each quarter, put money aside. The easiest way is to open a second bank account and try and put to one side all the VAT from your sales, that way when you submit your return, you should have more than enough to cover the bill. Remember the VAT you collect on your sales is not your money – you are the collector for HMRC, so start right from the beginning saving the VAT to pass back to HMRC.
Whatever your concerns may be where VAT is concerned MJB Avanti have years of experience and would be more than happy to help, (08000) 388 799