What is VAT and How to Register?

If you are running a business and are just starting off, VAT is something that you will need to keep in mind. We are going to run through what VAT is including when you are required to register.

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What is VAT?

VAT is Value Added Tax, this is a type of sales tax collected by HMRC. When you have registered for VAT, you will need to charge VAT on top of your sales invoices. The VAT element is not actually yours and will need to be kept aside to give to HMRC (calculated when you complete your quarterly VAT returns).

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The benefits of being VAT Registered is you are now able to claim back the VAT on any purchase invoices i.e for materials etc. The VAT reclaimed is offset against the VAT paid by your customers. The VAT liability remaining from the two differences is paid to HMRC.

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VAT on sales less VAT on purchases = VAT to be paid to HMRC

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Domestic Reverse Charge (DRC) VAT

Domestic Reverse Charge VAT applies for construction businesses that fall within CIS. DRC means if you are working for a contractor you will not charge 20% VAT instead you will select the Domestic Reverse Charge option, this will remove the VAT from the invoice and now it becomes the contractor's responsibility to declare and claim the VAT element on their VAT Return.

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When To Register for VAT

You are not required to register for VAT until you exceed the VATable turnover which is currently £85,000 (January 2023). This is something you will need to keep an eye on as if you do exceed this limit, HMRC will backdate when you were required to register and request the VAT which was not paid, to be paid.

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At the end of every month it is worth checking to see if you are approaching the £85,000 threshold.

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You are able to voluntarily register for VAT in the same way as normal VAT registration

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How To Register for VAT

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Once you are approaching the £85,000 VATable turnover limit, it is best to start getting everything in motion, you can apply for VAT on HMRC website here.

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If you have your government gateway account:

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1. Go to the Register for HMRC taxes page, select the appropriate option, and then click the “next” button to go through the pages.

2. Select “I have an account – login” on the final page.

3. On the sign in page, enter your Government Gateway details.

4. Once logged in, scroll down to the “Get another tax, duty or scheme” section of the page and click the button underneath this.

5. Select VAT and follow the final steps to complete your VAT registration application.

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If you do not have a Government Gateway Account, you will need to create one to continue.

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VAT can often be tricky to understand when something is 20%, 5%, exempt or even under domestic reverse charge for construction, at this point it might be worthwhile looking for some one who does bookkeeping services rather than learning all the rules by yourself.

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The normal VAT reporting period is every quarter in which the VAT payment is due 1 month and 7 days after the quarter ends. It is highly recommended to set up a Direct Debit with HMRC as you will receive an extra 3 days before the payment is taken plus you will not accidentally forget to pay!

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With the latest changes to Making Tax Digital, even if you voluntarily registered for VAT you are required to have a Making Tax Digital compliant software like Xero.

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What Do You Need To Register For VAT?

To complete your VAT registration, you’ll need:

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• Your business contact details
• Bank account details
• Unique Tax Reference number
• Details of your turnover and nature of business.

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VAT Schemes - Which One Should I Pick?

There are several schemes available each with advantages and disadvantages, typically VAT Cash Scheme is the best however let's go through each one together:

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Annual Accounting VAT Scheme

With the Annual Accounting VAT Scheme you are only required to complete a VAT return once a year. You are required to make advance payments to your VAT return based on your last VAT return or estimated figures if this is your first Annual VAT Return.

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The VAT administration is less as you only need to complete one VAT return however this will need to be completed in one go so effectively the workload is the same.

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VAT Flat Rate Scheme

The Flat Rate Scheme is where depending on what type of business you are, you will pay a predetermined VAT percentage. The main advantage of this scheme is this simplified VAT Return process.

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VAT is still charged at 20% but say your industry has a 12% VAT rate, this is what you will pay to HMRC, the remaining 8% you can keep. You don’t reclaim VAT on purchases on the Flat Rate Scheme so it is mainly beneficial for companies that spend low amounts on materials.

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The scheme has low turnover entry and exit points so if you are looking to grow it is usually recommended to pursue a different scheme.

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VAT Cash Accounting Scheme

VAT Cash Accounting Scheme is usually the most common option as it prioritises cashflow. You only pay VAT once you have received the income or paid suppliers.

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VAT Accrual Accounting Scheme

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The VAT Accrual Scheme is the default option so if you do not select a scheme this is the one you will use. The VAT is paid based on the invoice date so it does not matter if you have received money, the VAT element will need to be paid in the quarter it falls into.

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Why Should You Become VAT Registered?

Sometimes you will be required to register for VAT but if you are under £85,000 then you will have a choice if you would like to voluntarily register for VAT.

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If you are in the domestic market, it can be beneficial to holdout as long as possible as you are effectively 20% cheaper in your costs however it may be better to start how you mean to go on, by this we mean if you start charging VAT from the beginning your clients are expecting you to charge VAT and understand why however if all of a sudden after 2 years you start charging VAT this might be an unexpected surprise.

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We would recommend being VAT registered from your first client, it makes your materials and other services you use such as your accountant, software, tools, materials cheaper which if you really wanted to, you could account for this in your pricing.

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Advantages of being VAT registered:

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• You will appear a bigger business if you’re charging VAT as people will assume you are earning £85,000 +
• If you purchase materials etc from VAT registered companies, you can claim the VAT element back
• If you sell to a VAT registered company they can claim the VAT element back on your invoices, this is where targeting corporate clients may make commercial sense for your business.
• You will need better bookkeeping systems and controls for your business, which will later on provide better financial results and analysis
• You are able to claim pre registration expenses when you first register for VAT for the previous 4 years on materials and 6 months for services.
• If you are working for contractors you are likely to be in a VAT reclaim position which means you will be receiving refunds from HMRC.

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Disadvantages of being VAT Registered:

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• You will have to charge 20% VAT (where applicable) on your invoices to your clients which will make you more expensive compared to before
• Increase admin and bookkeeping costs/time with receipts and VAT returns.

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