Every now and again we come across a situation of a client who has overlooked their obligation to register for VAT. This can be very costly.
A client will usually be obliged to register for VAT based on their sales having exceeded the threshold, currently set at £85,000.
The general test is to look back over the previous 12 month’s cumulative sales, and for any month when the threshold is exceeded, an obligation to register will arise. A client must maintain a summary of their sales to keep this under monthly review where they are close to the threshold.
If that obligation is overlooked, a number of implications will arise.
Sales VAT (output VAT) will not have been included on invoices raised to customers. If those customers are themselves in business (B2B sales), and VAT registered themselves, this may not prove to be too costly as they can be re-invoiced to include the VAT.
However, if those customers are not in business, then one sixth of the amount originally invoiced may have to be accounted for as sales VAT to HMRC. This will materially impact on the margin earned on those sales.
Depending on how late the VAT registration is submitted, HMRC may impose a penalty.
If your business is not yet VAT registered, and your cumulative annual sales are at, or close to, the VAT threshold of £85,000, please contact us 01473 55885 urgently to discuss what action is required.