1. VAT registration limit
The VAT registration threshold is £81,000 from 1st April 2014. This means if your taxable income has gone over this limit within the last 12 months, you must register for VAT.
However, what you may not realise is that you must revisit this turnover limit on a rolling 12 month basis. You do not start from nil at the start of a new tax year or once your accounts year has come to an end. This could mean that you have gone over the VAT threshold during the year and missed your chance to do anything about it.
The best solution is to keep a spreadsheet of your monthly turnover, set up to calculate your rolling turnover. If you are close to the threshold and need advice, contact your accountant.
It seems self-explanatory, but you can’t deregister unless you are registered. If you go over the threshold, you have until the end of the following month to register for VAT.
If you do not register when you should and then your turnover subsequently drops back below the registration threshold, you may have a problem, because if HMRC discovers you should have registered at some point, they will insist you do so retrospectively.
You can then deregister (if you are now below the threshold) but you cannot back date deregistration, so potentially you could owe the tax man up to four years’ worth of VAT before being allowed to deregister, as this is the standard length of time HMRC has to investigate all tax enquiries.
Avoid this by keeping an eye on your turnover as detailed in point one. If you temporarily go over the limit as a one off, you can ask HMRC for exception from registration. Once you have this, they cannot request you register.
If your turnover is simply rising, you must register on time and then deregister as soon as you can foresee a decrease in income.
3. Reclaiming costs
If you bought goods or services before you registered for VAT, you may be able to reclaim the VAT you paid on them. You can generally reclaim VAT on goods you bought up to four years before you registered as long as they were for business purposes and you still hold them on the date of registration.
This is particularly useful if you had to spend significant amounts on equipment before you could start to trade. As long as you have kept the receipts, you can reclaim the VAT and reduce the amount owed on your first VAT return – or it may even be a refund! Any VAT on services you have bought six months before registration can also be reclaimed as long as they are for business purposes.
4. VAT relief
You can also claim back VAT on some costs incurred after you have deregistered. You can claim relief for VAT on services supplied to you after your registration was cancelled, as long as these services relate to the period when you were VAT registered. Examples could include services provided by a solicitor or an accountant.
5. Beware of the flat rate scheme
This can offer a simple and cost effective way of calculating your VAT liability but businesses need to take certain factors into consideration before committing to it. Under this scheme you apply the reduced flat-rate percentage to all business income, but what most people don’t realise is this rate must also be applied to income that is exempt or zero-rated. Not doing this could leave you significantly out of pocket.
For example, let’s say a sole trader runs a shop for which he is VAT registered. He also owns a house which he rents out. The rental income is exempt from VAT, but as he is the VAT registered person (not the business) under the Flat Rate Scheme he must pay VAT from both the shop and the rent.
By Sue Redmond of accountancy firm Lloyd Piggott