Q. When does a business become liable to register for VAT?

A. You become liable to register for VAT if your taxable income exceeds £70,000 in a 12 month period, although this amount changes year on year. Taxable income is any reduced rate (certain building services, children’s car seats etc), or zero-rate income (again certain building services, newspapers, cold food, exports etc) and standard rated income (just about everything else except exempt). Exempt income does not count towards this total, and could include receipts from property rental, betting, finance, education, etc.

If your taxable income in a 12 month period exceeded £70,000, say in January, you would be liable to register from 1st March. If this occured in February, it would be the 1st April. If you receive a single payment, exceeding £70,000, you actually become liable to register when you become aware that this will happen in the next 30 days.

Registration involves the completion of a form, a VAT1 and this must be sent to HMRC within 30 days of becoming liable to register. In practise most businesses use their accountant to deal with this. If however you do not register on time then, depending on the circumstances, HMRC can impose a penalty of up to 30% of the net VAT due (it can be 100% if they think a business deliberately avoided registration). In short, it pays to keep a monthly check on the level of turnover achieved.

If you cross the threshold it is possible to obtain exception from registration. This would be allowed if you can demonstrate to HMRC that your business crossed the threshold because of a large unusual piece of work; this work would not be repeated and your estimated income in the next 12 months would be below £68,000 (the deregistration threshold). HMRC also allow a business not to register if all that would happen is that repayments would be received.

From 1st April anyone registering for VAT has to submit VAT returns online and pay electronically. For anyone not comfortable with the internet, unfortunately there are very few exceptions to this rule. However, it is always possible to appoint an agent to do this on your behalf.

If all else fails and a business has to register then remember that VAT on stocks and assets on hand at the time of registration can be reclaimed on purchases made up to 4 years earlier. VAT can also be reclaimed on services received up to 6 months earlier but only if those services relate to supplies made after registration.

For further information, or advice on VAT or other tax related issues, call the TaxWise Advice Service on 01455 852555.