VAT registration is one of those business milestones that can feel a bit scary when you first encounter it. Whether you’ve suddenly crossed the registration threshold, landed a big contract that’s going to push your turnover higher, or you’re considering registering voluntarily, knowing what to do next can save you a lot of stress and potential headaches with HMRC.
The good news is that registering for VAT is usually much more straightforward than people expect. As long as you understand when registration is required, have the right information ready, and follow the process step by step, you’ll be set up and compliant in no time.
What is VAT?
In case you’ve never come across it before, or just want a refresher, VAT stands for Value Added Tax. It’s a consumption tax that’s added onto goods and services, and while it’s variable, it usually sits at around 20% depending on what scheme you’re on. VAT is applied to any goods or services you buy, as well as any other taxable supplies. For businesses, VAT is pretty important. Once you hit a certain threshold, you have to register for VAT with HMRC, and afterwards you can both charge VAT on your goods/services, and claim the VAT you pay back too.
When do I Have to Register?
There are three triggers for a business to register for VAT. Two of them are compulsory, so you have no choice but to register if you meet the criteria.
The first is called the 12-month rollback, and it’s one of the compulsory reasons for registering. If your business taxable turnover exceeds £90,000 in any rolling 12-month period (not just your financial year), then you have to notify HMRC and register for VAT. You have to do this within 30 days of month-end where you went over that limit.
The second is also compulsory, but this one is looking forward instead of back. It’s called the 30-day forward look, and in this case it’s if you expect your taxable turnover to go over that £90,000 mark in the next 30 days alone. For example, if you’re about to sign a major contract. You have to register for VAT before the end of that 30-day period in this case.
In both of those cases, being able to really know your numbers is essential, which is why having a good bookkeeper in your corner is also, essential!
The third is voluntary. Yes, some businesses do register for VAT even if they don’t legally have to! It sounds crazy, but there are reasons it makes sense. Three of the most common are wanting to reclaim VAT on a large business purchase, where the amount they could reclaim would be significant.
Second, that they want to claim back the VAT they paid on purchases in the past. When you register for VAT, you can retroactively claim the VAT back for any purchases of goods purchased up to 4 years ago that are still in the business at the date of registration, and up to 6 months of services. For some, that’s a hefty payment.
The third is to project the image that they’re a bigger business than they are. There are some bigger businesses, organisations and even the government that won’t work with smaller businesses, and being registered for VAT means your business looks much bigger on paper – often by enough to win the business!
How do I Register for VAT?
Step 1, The Reason: The first step for registration is actually in the last section. Identify the reason you’re registering. Your options are the 3 above – the 12-month rollback, the 30-day forward look, or voluntary registration. It’s an important thing to know, as it can dictate your application timeline and what your effective tax date will be once the application is processed. Once you’ve got your reason (or registration trigger as HMRC call it), you can move onto step 2.
Step 2. Gather Documentation. Before you log into the HMRC registration portal, take a few days to gather together the records you’ll need. These will be different depending on the structure of your business.
For sole traders:
- Your national insurance number
- Your Personal ID (a passport or drivers’ licence)
- Your Self-Assessment UTR (unique taxpayer reference, if you have one)
- An exact business turnover history
- A recent P60 or business bank records
Whereas Limited Companies will need:
- Your company registration number
- Corporate bank account details
- Corporation Tax UTR
- Exact annual and forecasted turnover figures
- PAYE or payroll information (if applicable)
It’s much more stressful trying to find all of this when you’re halfway through the application, so get it ready beforehand.
Step 3. Fill in Your Application: Time for the official bit! There are 5 steps to actually filling out your application.
- Access the portal. Go through the HMRC sign-in page and log in using your Government Gateway ID and password. If you don’t have one, create one to move ahead.
- Select the tax service. There should be an option for ‘get another tax, duty or scheme’ within your account dashboard, and from there select VAT.
- Fill in the specifics of your business. It asks you for the information piece by piece and provides guidance for anything you might need explaining. The main things it needs are your business structure, exact turnover data and industry classification code (which is the one that trips most people up)
- Choose an accounting scheme. You can choose the standard quarterly scheme, the flat rate scheme or the cash accounting scheme (if your turnover is less than 1.3m). I’ve got more info on what all of these are and how to pick the right one for you here.
- Review, submit and save. Check that everything you’ve put in is correct, then click submit! It will give you an acknowledgement screen with an application reference number on it – make sure you save this so that you can track the progress of your application later.
Step 4. Manage Your Compliance: HMRC typically processes VAT applications within 10-30 days. While you’re waiting for that, there are 3 things you need to do:
- Don’t charge visible VAT. You can’t issue invoices with VAT or show VAT as a separate line item until you have your 9-digit registration number in hand, which you won’t get until you’ve been approved.
- However, you are legally liable for VAT from your effective registration date, so you’ll be paying it even if you can’t charge for it. A good way to manage this is to temporarily adjust your gross prices up so that the amount you can charge for VAT is included, and you can put it towards your liability.
- Implement MTD software. All VAT registered businesses are required to use Making Ta Digital compatible software to manage sales and submit VAT returns digitally. MTD was always going to make its way in somewhere!
Bonus tip: set up a pot in your bank account for VAT. It’s fairly easy to estimate roughly what your VAT bill will be each time, so you can divide that number up and put money away into your VAT pot each month to cover for it. That way, you’ll never be caught short when the VAT bill comes. I know it sounds like there’s a lot of form-filling-in and complicated calculations that need to be done, but it’s not as bad as it sounds. And you don’t need to be the one doing it! At Bluebell Bookkeeping and Admin, my job is to make sure your books are in good shape and prepared for filing your VAT returns. While I can’t do the physical filing for you, I can make sure everything is ready and in order for you to press the right buttons. If you’d like to know more, or if you need some help getting set up for VAT and preparing your returns, give me a call – I’d love to help.