If you are in business but are not registered for VAT then, if you are turning over £1,400 each week or £6,000 each month, you must make yourself familiar with the registration limits as you could otherwise inadvertently incur a large liability.
Whether you must register for VAT depends upon your turnover in any twelve month period. We will look at each of these in more detail.
Turnover
Turnover is, with very few exceptions, the total of the sales that you make whether VAT is chargeable on those sales or not. For instance, there is no VAT chargeable on children’s clothing because these are zero-rated. However, for the purpose of deciding whether you must register for VAT then you must include these sales in your calculations of turnover. We give a number of examples at the end.
It is possible that if either:
all of your supplies are zero-rated, or
the vast majority of your supplies are zero-rated and you can demonstrate that the VAT that you pay on the goods and services that you purchase for your business would generally be greater than the VAT on your sales
then you may be granted exemption from registration. However, you must still complete a VAT registration form if your turnover exceeds the limit and tick the appropriate box to apply for the exemption.
Some items are exempt as opposed to zero-rated, such as financial services and insurance and these items are not included in the turnover calculation. However, this will affect only a small number of people.
Any Twelve Month Period
In deciding whether registration is required the annual turnover must be considered for each period of twelve calendar months, which is not the same as your financial year. For instance, your accounts for the year to 31st March 2013 may show a turnover of £80,000 which is below the VAT limit. However, you cannot then wait until 31st March 2014 to see whether the limit has been exceeded. Instead, you must look at the turnover for the period from 1st May 2012 to 30th April 2013, then for the period from 1st June 2012 to 31st May 2013, and so on throughout the year. This means that you must review this yourself each month instead of relying on your accountant who only sees your records every twelve months.
One horror story relates how one trader produced his accounts, for instance to 31st March in each year, and those accounts consistently showed turnover below the registration limit. However, someone in the tax office looked at his turnover on a month by month basis and found that for one period of twelve months, say to 31st October several years previously, his turnover exceeded the VAT limit by a few pounds. Because of this he was compulsorily registered with effect from that date.
Of course, the trader immediately applied for de-registration on the grounds that turnover had immediately fallen below the limit. However, whilst the effective date of registration was several years previous, the actual date of registration was when the error was found and the registration certificate issued, and he could not apply for de-registration before he was registered. Therefore, he had to pay VAT on several years of his takings, as well as interest and penalties!
Summary
If you are trading anywhere near the VAT registration limit you must monitor the position carefully. This includes:
being aware of the VAT registration limit at particular date. As we write, that limit is £81,000 but generally increases each year,
being aware of what receipts must be included in the turnover calculation, and
being aware of what your turnover is for each and every twelve month period.
For this purpose a month means a calendar month.
Anyone who thinks that they may be affected by this and who wants further advice then please contact us.