Not VAT registered? Then you may want to start thinking about this, especially if your revenue is growing significantly. We look at why it’s important to get VAT registered at the appropriate time and what the threshold is for business.
As a business owner, it’s essential to have a strong understanding of your company’s financials. That includes ensuring you are compliant with government laws. Those surrounding VAT are of particular importance, especially since there are serious penalties for businesses that register late.
It’s important to be aware of and monitor any month-on-month revenue increases, as each of these takes you closer to the VAT threshold. We’ll run through what that threshold is for businesses and why it’s worth registering earlier than you might think too.
What is the VAT threshold?
Currently, the VAT registration threshold is £85,000. If your vatable turnover exceeds this, then you should look to register ASAP. There’s a grace period of 30 days to register, and failure to do so can be costly for your business.
The importance of monitoring your turnover for VAT registration
So why is it so important to monitor your turnover, especially if you’re not quite at £85 000 annual turnover but are on your way there? Well, VAT turnover is based on a rolling 12 month period, not a 12-month financial period which a tax return is based on. That means you should be checking your revenues every month in case you suddenly cross the threshold.
Consequences of a late VAT registration
Not registering for VAT in time can lead to some significant penalties and issues for your business.
For one, late registration may make you liable for a penalty of 5% – 15% of VAT due (the minimum penalty is £50).
In addition to penalties, you’ll be required to include VAT on all sales back to the date the business should have registered. That stands, even if no VAT was charged to the consumer at that point.
If most of your customers are VAT registered themselves, this shouldn’t be a significant issue, as you can raise a VAT only invoice and collect payment. That being said, this could still cause cash flow problems depending on how quickly your customer can pay the invoice.
In the instance where most of your customers aren’t VAT registered, you cannot charge the VAT onto them. Despite this, you still must pay it to HM Revenue and Customs. That essentially reduces your gross profit margin and can impact your cash position.
What do I do if I’ve not registered when I should have?
If you’ve left things too late, it’s important to act quickly to reduce the penalties you may incur. Remember this: the quicker you act, the more favourably HMRC will view your application.
As of April 2019, the government introduced ‘Making Tax Digital’. That requires all VAT businesses to store their accounting records on cloud-based software. At Bracey’s we are Gold Xero partners, which means many of our clients are already using cloud-based software (and we’d highly recommend Xero to any business).
First, you’ll need to enter all business transactions for the period since you should have registered, in order to calculate the VAT due. You will also want to decide whether to register for VAT on an accrual or cash basis or under the flat rate scheme. Which of these is most beneficial will depend on your business and unique circumstances. You can find more information about each VAT scheme here: https://www.gov.uk/vat-businesses.
Lastly, complete the VAT registration application. Once you receive the VAT number, submit the VAT return.
So, I’ve registered – now what do I do?
Once your business is VAT registered, there’s still a bit of ongoing work to do.
For one, you’ll be required to complete a VAT return for each quarter. You’ll then need to file and pay any VAT due one month and seven days after the quarter-end. For example, if your VAT quarter is the 31st March, you should file the return by the 7th May.
As such, you’ll want to ensure your accounting software is set up correctly to charge the VAT on to the customer. Your quotes and invoices should also include the business VAT number. You must keep copies of all VAT invoices and receipts for at least seven years.
Close and regular monitoring of your financials can go a long way in saving your business time and money. Registering for VAT at the right point will help you avoid potential financial penalties. It also means you’re taking your business and its growth seriously and can help you put a positive intent out for future growth.
How can Bracey’s Help?
At Bracey’s, we’re all about simplicity. So, we like to make things for our clients as smooth and hassle-free as possible. Whether you just want some advice or are unsure about expenses you can reclaim VAT on, we can help. If you’d like us to complete the entire VAT registration process for you, including preparing your VAT returns moving forward, we can do that too. We like to enable our clients through education, so our team also offers training sessions if you’d like to take ownership of your VAT returns in the future. We’re here to guide you every step of the way.