QUESTION: I currently operate as a sole trader, but I am not registered for VAT. My sales are around £80,000 but it looks as though this will increase quite a bit going forward as I have secured new business. Do I need to register for VAT?
ANSWER: In the UK, businesses making taxable supplies must register for VAT with HMRC if their taxable turnover exceeds the threshold. As of April 1 2024, this threshold is £90,000 (previously £85,000). The threshold helps small businesses operate without the burden of VAT. There are two perspectives to consider for taxable turnover: historical (backward look) and future (forward look).
Liability to Register
You must register for VAT if:
1. Your taxable turnover exceeds the threshold in the past 12 months (historical view).
2. You expect your taxable turnover to exceed the threshold in the next 30 days (future view).
Taxable turnover includes, but not limited to:
· All taxable supplies (standard, reduced, and zero-rated) in the UK.
· Certain capital supplies and self-supplies.
The supply date is either when the supply is made or when payment is received.
Registration is mandatory if taxable turnover exceeds the threshold at the end of any month over the previous 12 months. Notify HMRC within 30 days if this happens. Registration takes effect from the start of the month following the threshold breach, and VAT must be charged on all taxable supplies from the effective date of registration.
If expected turnover in the next 30 days alone will exceed the threshold, notify HMRC by the end of this period. Registration starts from the beginning of these 30 days or earlier if agreed with HMRC. Documentation of the anticipated increase in turnover is crucial.
Applications for VAT registration can be made online or via form VAT 1. Registration options available to you include:
· Sole proprietor
· Partnership
Late registration incurs significant costs. The effective date of registration remains as if on time, and sales from that date are inclusive of VAT. Recovering input tax is possible but requires adequate records. Penalties are based on potential lost revenue (PLR) and depend on the trader’s behaviour and disclosure quality.
The Flat Rate Scheme simplifies VAT for small businesses with a taxable turnover of £150,000 or less (excluding VAT). Under this scheme, you pay a fixed percentage of your turnover to HMRC and keep the difference between what you charge customers and what you pay HMRC. The percentage depends on your business type.
Key Features:
· Simplified VAT calculation.
· Cannot reclaim VAT on purchases (except certain capital assets over £2,000).
· Different flat rates for various business sectors.
· May benefit businesses with low VAT on purchases.
Eligibility:
· Taxable turnover must be £150,000 or less (excluding VAT).
· Cannot have been VAT registered in the last 12 months.
· Cannot be part of a VAT group or division.
· Must not use the second-hand margin scheme, the tour operators’ margin scheme, or the capital goods scheme.
Businesses can leave the scheme if they exceed the turnover threshold or choose to revert to standard VAT accounting.
In summary, understanding VAT registration requirements and the flat rate scheme can help sole traders manage VAT obligations effectively, avoiding penalties and optimising tax recovery.
- Feargal McCormack (f.mccormack@fpmaab.com) is managing partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.