Do You Need To Register For VAT?
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As a Chartered Accountant running an Accounting firm, I frequently encounter questions about VAT registration, particularly from those navigating the world of side hustles. Given that VAT (Value Added Tax) is one of the more challenging aspects of UK taxation, its noticeably absent from the typical educational curricula despite its daily relevance. So, let’s shine some light on the subject.
Whether you're moonlighting as a
mystery shopper
or scaling an
Etsy store, understanding VAT is crucial. While the complexity of VAT can make anyone's head spin, this article aims to untangle the knots for you.
When Should You Sign Up for VAT?
In a nutshell, as of this writing, HM Revenue & Customs (HMRC) guidelines state:
Your business needs to be VAT-registered when its taxable sales surpass £85,000 within a rolling 12-month timeframe. HMRC gives you a 30-day window from the month's end in which you cross this threshold to register for VAT.
In a 'rolling' 12-month period, you always consider a full year of your business's operation.
For instance:
You've recently concluded your inaugural year, spanning January 2022 through December 2022.
When February 2023 arrives, you will subtract January 2022's figures and include January 2023's in your total.
So, you're always considering a 12-month period for your VAT calculations.
Critical Timing Factors for VAT Registration
Here are some noteworthy tidbits:
Some enterprises, such as those in insurance or finance, may be ineligible for VAT registration due to the nature of their 'exempt' services.
Some types of income, like foreign earnings, might not contribute to the £85,000 threshold.
Thorough research in such specialised scenarios is advised. You can read more at the
HMRC website or you can consult a Chartered Accountant for specific advice.
Voluntary VAT Registration Before Reaching the £85,000 Limit
You can register for VAT on a voluntary basis before you reach the £85,000 registration threshold. Many business owners opt for early registration to reclaim VAT on expenses.
But keep in mind that while you can reclaim VAT on purchases you make for the business, you must also charge VAT on your sales.
You will also have to set aside time for completing your VAT bookkeeping and submitting the quarterly VAT return. MTD accounting software can help with this. The software clients of my accounting firm use include
Xero,
QuickBooks
and
Sage
(amongst many others).
The Different VAT Rates
| Name | Current Rate | Description and Examples |
|---|---|---|
| Standard | 20% | The default rate for most UK goods and services unless designated as reduced or zero-rated. |
| Reduced | 5% | Includes domestic fuel, energy-saving materials, sanitary products, children's car seats, etc. |
| Zero | 0% | Covers food (excluding restaurant meals and hot takeaways), books, children's clothing, public transport, etc. |
| Exempt | N/A | No VAT is charged on these items by law. Examples are insurance, credit provision, education, fundraising, memberships, etc. |
| Outside the Scope | N/A | Completely outside the UK VAT system, such as drawings, salaries, MOT tests, and rates. |
Businesses like children's shoe shops might voluntarily register for VAT. Their main sales and purchases are generally zero-rated, but they can recover VAT incurred on overheads, legal fees, or equipment.
Choosing a VAT Scheme
After determining when to register for VAT, you will need to select the best VAT scheme for your business. The three main options are:
Flat Rate Scheme
The Flat Rate Scheme is a simplification measure for businesses with a taxable turnover of less than £150,000. You apply a fixed flat-rate percentage to your net turnover. For instance, if you're in consulting with a 14% flat rate, and your net quarterly turnover is £20,000, you'd owe £2,800 in VAT to HMRC.
Low-Cost Traders are those who spend less than 2% of their sales turnover, or less than £1,000 annually, on goods (not services). For Low-Cost Traders, the flat rate is 16.5%. So, with a net quarterly turnover of £20,000, you'd pay £3,300 in VAT. For many businesses deemed to be low-cost traders, it may be worthwhile looking at using the cash accounting scheme instead.
Cash Accounting Scheme
The Cash Accounting Scheme can be used by businesses with an annual turnover of less than £1.35 million. This scheme allows you to pay VAT only when you've received payment from customers. For example, if you invoice £30,000 but receive only £24,000 in a quarter, your net revenue would be £20,000 making your VAT amount £4,000.
Accruals/Invoice Scheme
In this method, you calculate VAT based on invoices sent and received, not cash flow received. If you invoice your customer £24,000 (gross) or £20,000 (net of VAT) in a quarter, you'd owe £4,000 in VAT to HMRC (20% of the net amount of £20,000), regardless of whether you’d received the money from your customer. If you also receive a supplier invoice for £12,000 (£10,000 net of VAT) but haven't paid it yet, you could still reclaim £2,000 in VAT (20% of £10,000), reducing your total payable VAT amount to £2,000 (£4,000 output VAT less £2,000 input VAT).
General VAT Strategies Employed by Businesses
Every business has its unique VAT circumstances, but some trends are apparent:
Businesses catering to the general public
Businesses catering to the general public usually defer VAT registration until it's mandatory, mainly to sidestep profit and pricing issues
B2B companies
On the other hand, B2B companies often choose to register early, as their clients can usually reclaim the VAT charged, making it a non-issue.
Remember, this is a general guideline. We strongly recommend consulting a Chartered Accountant for tailored advice to your own position.
What About VAT Paperwork?
Upon VAT registration, you'll be obliged to submit digital VAT returns to HMRC, typically on a quarterly basis, though monthly submissions are also possible.
This process falls under the 'Making Tax Digital for VAT' (MTD) framework and may require software and administrative efforts.
Given VAT's intricate nature, many business owners opt to consult an accountant for assistance in filing these returns.
FAQs
before you go...
Sorting out VAT is just the beginning in the UK's tax maze. Don't let tax issues trip up your side hustle or business venture. Check out our next article on 'Side Hustles and Your Tax Obligations' for a full rundown on UK taxes.
sidehustles.co.uk one-minute PODCAST
🎧 Listen Now: Sidehustles.co.uk One-Minute Podcast – Do you need to register for VAT?
Welcome to the Sidehustles.co.uk One Minute Podcast. In the next 60 seconds, we're sharing a real-world insight from our network of seasoned side hustlers. This quick tip is designed to offer you practical advice that you can apply immediately in your side hustle journey.
Today, we're shedding light on a subject that bewilders many UK business owners—V.A.T registration. If you've been confused about when to register, listen up! According to HMRC, you need to register if your taxable turnover (sales income) exceeds £85,000 in a rolling 12-month period. But here's a real-world insight: some businesses register voluntarily before hitting that limit. Why? To reclaim V.A.T on expenses.
Just remember, you'll also have to charge V.A.T on your sales. Keep in mind that choosing the right scheme is crucial and varies from business to business. For tailored advice, consider consulting a Chartered Accountant. That's your one-minute real-world insight. Stay tuned for more!
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