Registering for VAT is an essential process for businesses in the UK that either meet the taxable turnover threshold or choose to register voluntarily. With the advent of digital platforms, you can now register VAT online with HMRC, making the process more efficient and user-friendly. This article serves as a comprehensive guide to assist you in navigating the VAT registration process and managing your VAT obligations effectively.

What is VAT and Who Needs to Register?

Value Added Tax (VAT) is a tax applied to most goods and services sold by VAT-registered businesses. You need to register for VAT if:

• Your taxable turnover exceeds £90,000 in the last 12 months or is expected to exceed this amount in the next 30 days.
• You wish to voluntarily register to reclaim VAT on purchases, even if your turnover is below the threshold.

Steps for VAT Online Registration with HMRC

1. Prepare Required Information:
   Before starting the registration process, gather the following details:
   • Business name, address, and contact information.
   • Unique Taxpayer Reference (UTR) number.
   • National Insurance Number (for sole traders).
   • Bank account details for VAT payments or refunds.
   • Details of your taxable turnover and business type.
2. Create a Government Gateway Account:
   • Visit the HMRC website.
   • If you don’t have an account, follow the prompts to create one by providing your email address and setting up a password.
   • Activate your account using the code sent by HMRC.
3. Complete the Online Registration Form:
   • Log in to your Government Gateway account.
   • Select “VAT and VAT Services” under “Add a tax, duty or scheme now.”
   • Fill out all requested information accurately, including business details and turnover figures.
4. Submit Your Application:
   • Double-check all details before submitting your application through the online portal.
   • Once submitted, you will receive an acknowledgment from HMRC confirming receipt of your application.
5. Processing Time:
   • HMRC typically processes applications within 10 working days but may take longer if additional information is required.
6. Receive Your VAT Registration Number:
   • Once approved, you will receive a 9-digit VAT registration number via email or post. This number must be included on all invoices issued by your business.

Managing VAT After Registration

Once registered, managing VAT effectively is essential for compliance. Here are key steps:

1. Set Up Your VAT Online Account:
   Use your Government Gateway credentials to access the VAT services portal. Here, you can submit returns, make payments, and update registration details.
2. Charge VAT on Sales:
   Apply the appropriate VAT rate (standard, reduced, or zero) on all taxable sales and issue proper invoices.
3. Reclaim Input VAT:
   Claim back VAT paid on business-related purchases through your quarterly returns.
4. Submit Quarterly VAT Returns:
   File accurate returns detailing output tax (VAT collected) and input tax (VAT paid). Ensure timely payment of any balance owed.
5. Maintain Accurate Records:
   Keep detailed records of sales, purchases, and returns for at least six years as required by HMRC regulations.
6. Choose a Suitable Accounting Scheme:
   Depending on your business size and structure, consider schemes like cash accounting or flat rate schemes to simplify reporting.

Benefits of VAT Online Registration with HMRC

• Efficiency: The online system allows you to save progress and return later if needed.
• Faster Processing: Most applications are processed within 10 working days.
• Convenience: Manage all aspects of your VAT obligations in one place through your online account.

Penalties for Non-Compliance

Failure to register on time or submit accurate returns can lead to significant penalties. Timely registration and diligent record-keeping ensure compliance with HMRC regulations.

Conclusion

VAT online registration with HMRC is a straightforward process that ensures businesses meet their tax obligations efficiently. By following this guide, you can navigate registration and ongoing management seamlessly while staying compliant with UK tax laws.

For personalized financial solutions and expert guidance, consider collaborating with MAH Chartered Accountants, who are committed to supporting your business’s success.

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What is VAT?

Value Added Tax is an indirect tax aimed at consumers.

If a business meets certain criteria then it has to charge VAT on its sales of goods and services.

In a supply chain there are usually a series of businesses selling to each other until the final product or service reaches the consumer.

Generally, businesses can reclaim the VAT they incur on their costs of sales and overhead at each step of the supply chain and so ultimately the consumer is the one who ends up bearing the cost of VAT.

VAT is a regressive tax and typically makes up a larger proportion of budget for a low income household compared to a high income household.

VAT rules

The key legislation is the Value Added Tax Act 1994 (“VAT’94”). There are also Statutory Instruments and in certain cases the detailed rules are set out in HMRC notices and leaflets.

HMRC’s notices are very helpful to explain the rules and are aimed at businesses, whilst their internal manuals also go into significant detail. There is also a lot of case law where HMRC or taxpayers have taken each other to court over how the rules are interpreted.

Whereas many other taxes and accounting rules are principles based, VAT is almost rules based due to the large number of specific rules set out in legislation and case law to cover specific circumstances and scenarios.

Output VAT

Businesses have to charge VAT on their goods and services if they meet the criteria below. The most common rate of VAT is 20%, so if their net price excluding VAT is £100, they would need to charge a gross price of £120 including VAT.

Key criteria for charging VAT

Under s.4 VAT’94, VAT shall be charged on any supply of goods or services made in the United Kingdom where:

1. it is a taxable supply,
2. made by a taxable person,
3. in the course or furtherance of any business carried on by him.

If these criteria are not met, a supply is outside the scope of VAT, and VAT registration is not possible.

1) Taxable supply
A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply (s.4(2) VAT’94). Consideration must be charged for services rendered, even if its only £1. Free services are excluded from VAT.

There is a list of exempt supplies in Schedule 9 of VAT’94.

In addition to exempt supplies, certain sales made outside of the UK may also be outside the scope of VAT.

2) Taxable person
A business would be a taxable person if it is able to register for VAT, either voluntarily or compulsorily.

Its compulsory for a business to register for VAT if their annual sales exceed £85,000.

3) In the course or furtherance of any business
HMRC have set out a number of key questions based on case law, such as:

• Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
• Is the activity conducted in a regular manner and on sound and recognised business principles?
• Is the activity predominately concerned with the making of taxable supplies for a consideration?

Input VAT

To achieve the economic target of indirectly taxing consumers, businesses can reclaim the VAT that they pay to their suppliers, if they meet certain criteria. So if the gross purchase cost is £120, including VAT, then they can reclaim £20 VAT, so their net cost is £100.

Input VAT is the total VAT suffered on purchases, but these could be incurred in relation to taxable supplies, exempt supplies or non-business activities.

Under S.26(1),(2) VAT’94 a business can reclaim input VAT attributable to taxable supplies in the course or furtherance of their business (i.e. the same supplies on which output VAT is charged as defined in S.4 VAT’94 mentioned above). This is known as “input tax”.

Input VAT cannot be reclaimed on expenditure relating to:
• activities outside of VAT or non-business activities
• blocked items such as cars and entertaining
• exempt activities unless they are below a set level (de minimis of £625 on average per month and half of total input tax in period)

VAT Registration & administration

If a business makes taxable supplies and they are provided in the course of business, then they can register for VAT.

A business would then account for VAT by adding 20% (usually) output tax to their sales invoices and submitting a return to HMRC on a periodic basis (normally quarterly). On the return, they would then reclaim input tax, which is the VAT on purchases related to the provision of taxable supplies.

If output tax exceeds input tax, then a business would need to pay this excess to HMRC.

If input tax is higher, HMRC would pay the difference to the business.

On the VAT registration form an effective date is chosen (can be in the past) and VAT needs to be accounted for after this date. However, input VAT can also be reclaimed for expenses related to taxable supplies in the 6 months prior to registration.

You cannot usually reclaim input VAT on business entertainment however you can sometimes reclaim it for staff entertainment.

The notes below primarily come from VAT Notice 700/65 and VIT43200.

1) What is entertainment?

Entertainment involves hospitality of any kind, such as:

• provision of food and drink
• provision of accommodation (such as in hotels)
• provision of theatre and concert tickets
• entry to sporting events and facilities
• entry to clubs and nightclubs
• use of capital assets such as yachts and aircraft for the purpose of entertaining

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2) Business entertainment

VAT incurred for the purposes of business entertainment is specifically blocked from recovery under the Value Added Tax (Input Tax) Order 1992 (SI 1992/3222), art. 5. Case law defines business entertainment as: the free provision of hospitality to persons who are not employees of the business, employees including directors of limited companies.

For example, hosting or taking clients to the entertainment below cannot be reclaimed for VAT:

• golf days
• track days
• trips to sporting events
• lunch/evening meals at a restaurant
• trips to nightclubs

Exception: Meetings

VAT can be reclaimed if basic food and refreshments such as sandwiches and soft drinks are provided at a meeting held in the office to help it continue without interruption.

However, the VAT cannot be reclaimed if a meeting is held at a restaurant and the meal is classed as lavish. If no office is available, HMRC could potentially argue that it could have been held at location such as a meeting room for hire or a coffee shop.

Potential Exception: Overseas customers

HMRC mention:

The term ‘overseas customer’ means any customer not ordinarily resident or carrying on a business in the UK, including the Isle of Man.

VAT incurred on the entertainment of overseas customers may be recoverable when incurred for the purpose of the business if it’s reasonable in scale and character. However, there will be an output tax charge if there is a ‘private benefit’ to the individual enjoying the entertainment which will cancel out any recoverable input tax.

There is usually a private benefit when business entertainment is provided. However, in cases where the expenditure is necessary and for strict business purposes the private use may be ignored. Hospitality provided because it would be polite, because it’s expected, or because it would improve relationships is not for strict business purposes.

The rules on overseas customers relate to the joined Danfoss/Astra Zeneca ECJ case and this involved basic working lunches provided to customers free of charge.

Our policy is not to reclaim VAT if the entertainment involves any overseas customers unless it involves basic refreshments which are not lavish. So restaurant meals cannot be reclaimed.

Rare exceptions: hospitality with obligations

To be non-recoverable expenditure, the hospitality must be free of charge or obligation. In the case of C & E Commrs v Kilroy Television Co Ltd [1997] BVC 422, the participants in the talk show were provided with a buffet meal. The court found that the company had put itself in a contractual position to provide the buffet, which was the only payment the participants received for taking part in the show. Therefore, there was no business entertainment provided. In a similar case, a market research company provided sandwiches at product trials where the public were invited to sample alcoholic beverages and complete questionnaires on them. HMRC accepted that the alcoholic beverages were not business entertainment but assessed the VAT recovered on the provision of food. The tribunal found that the food was a necessary part of supplying the drinks and was not business entertainment (DPA (Market Research) Ltd [1997] BVC 4,071).

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3) Staff entertainment

Staff entertainment relates to providing employees with entertainment wholly for business purposes, such as to incentivise them and to foster team spirit.

The VAT can be reclaimed on staff entertainment, for example team meals/drinks, parties and other events.

Staff and employees do not include 3rd parties such as prospective employees, shareholders, former employees or pensioners, self-employed subcontractors, relatives or partners or friends of employees.

Travel & Subsistence

This is separate from entertainment if the primary purpose is not for entertaining. If an employee or director has to travel for business purposes then the input VAT of meals and accomodation can be reclaimed. HMRC generally use a five-mile radius from the office as an unofficial guide.

Entertaining involving only the Directors/partners

If no staff are included and the cost cannot be claimed as subsistence, then the VAT cannot be reclaimed. For example, the directors have a general lunch at a restaurant or attend a sporting event without any other staff.

If the directors work in separate locations far away from each other and decide to meet in person to discuss business matters then the VAT could potentially be reclaimed as subsistence.

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4) What if entertainment is held for both staff and clients/customers?

Meals/subsistence

If staff/directors are working from their usual place of working (eg home or their office) and then they meet with a client some distance away specifically for that meeting, then the primary purpose would appear to be entertainment, so the VAT cannot be reclaimed for the staff/directors.

If the staff/directors are working away at a client site for the day or travelling, then they have to eat. So if a client were to join them for the meal and the entertainment is secondary to the primary business purpose of the meal, then the VAT for the staff/directors can be reclaimed.

Our general policy is not to reclaim VAT on UK restaurants unless we are specifically informed that it includes subsistence and the number of proportion of the meal being claimed, to confirm the non-staff VAT is reclaimed.

General entertaining

If the staff are not acting as hosts for the clients/customers, then the VAT can potentially be reclaimed for staff. However, this is such a grey area and difficult to prove, our policy is not to reclaim VAT if the entertainment involves any clients or customers unless we are specifically informed that the staff were not acting as hosts.

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5) Why does MAH take a conservative approach to reclaiming VAT on entertainment?

Although we have dealt with a number of VAT investigations and enquiries and have a lot of experience in the kinds of things HMRC ask for, we don’t feel that its worthwhile trying to fight HMRC over entertainment as the rules about what is allowed or not are so grey.

When we look at the VAT court cases we find that event the Big 4 accounting firms KPMG and EY have lost cases against HMRC when they aggressively reclaimed VAT on entertaining.

Old flat rate scheme

Prior to 1 April 2017 the old flat rate scheme was very popular with many of our clients as they could earn an extra income under the scheme. Although they were not able to reclaim input VAT on expenses, they didn’t have to pass on the full 20% VAT charged to customers. Depending on their business category/sector they would pay a flat rate VAT less than 20% and so they could keep the difference.

New flat rate scheme for limited costs: 16.5%

The old scheme was originally designed to make things easier/quicker for small businesses to comply with quarterly VAT returns as it didn’t require businesses to record all their costs/expenses each quarter.

But in the Autumn Statement on 23 November 2016 the Government declared that businesses with limited costs were in effect “abusing” the flat rate scheme as their affairs were so simple they didn’t need it .

From 1 April 2017 businesses with limited costs would need to apply a much higher flat rate of 16.5%.

What are limited cost businesses?

A business will have “limited costs” if the gross amount it spends on relevant goods is either:

• less than 2% of VAT flat rate turnover (ie gross UK sales)
• more than 2% but less than £1,000 per year

Relevant goods include: stationery/office supplies, gas/electricity, stock, cleaning products etc.

They exclude services such as rent, accountancy fees, advertising, laptop/mobile and also electronic services such as software.

What is the impact of the new scheme?

If a business does not have limited costs or ….., then there is no impact and they can continue as normal.

For businesses with limited costs, the new flat rate scheme is 16.5%.

Example

Net sales £100,000

VAT charged to customers: £20,000

Gross sales: £120,000

Old flat rate scheme

eg consultant/contractor with flat rate of 14.5%

Flat rate payable is £120,000 x 14.5% = £17,400.

Profit on flat rate scheme is £20,000 – £17,400 = £2,600

So as long as input VAT on expenses is less than £2,600 then the flat rate earns an extra 2.6% for the business.

New flat rate scheme

eg any business meeting criteria of limited costs has a flat rate of 16.5%

Flat rate payable is £120,000 x 16.5% = £19,800.

Profit on flat rate scheme is £20,000 – £19,800 = £200

So this is a loss of £2,400 compared to the old scheme.

Normally most limited cost businesses will have more than £200 of input VAT, for example from accountancy fees, telephone bills, software/subscriptions etc. If so, then they should leave the flat rate scheme and claim input VAT under the normal scheme.

 

 VAT returns that straddle 1 April 2017

VAT returns for QE April and May 2017 will straddle the start date. The return has to be split into 2 periods, before and after 1 April 2017. The first period will be treated as under the old rules and the second period under the new rules.

 

Leaving the flat rate scheme

For businesses with limited costs and turnover below £83,000 pa it may be worthwhile to deregister for VAT completely to avoid the additional admin.

For businesses with turnover above £83,000, it may be best to leave the flat rate scheme. This can be done by writing to HMRC and requesting to leave. The normal leaving date will be the end of a VAT return period, but a leaving date of 1 April 2017 could also be requested.

Please contact us if you need help with this.

Is registration required for VAT for non-EU sellers using Fulfilment by Amazon in the UK?

This has been in the news recently and HMRC may have lost £2bn in recent times from non-EU sellers who have illegal evaded VAT and have recently announced methods of enforcing the VAT.

This is a tricky subject and can get very technical as many words used in the tax legislation have very specific meanings and there are also court cases about the VAT treatment, so this post is a very basic and simplified overview. Please see the video below for further details.  There may also be corporation tax considerations if selling to customers based in the UK.

If sales have a place of supply in the UK and involve consideration and are not exempt, then they will be taxable supplies.

The place of supply largely depends on the location of the goods and the identity of the importer. If the importer is also the supplier, then they will have to pay UK VAT when the goods are imported into the UK. This is because a non-EU seller who ships goods to Amazon’s Fulfilment Centre are the consignee and will be the importer and retain legal title over the goods.

Only once the goods are in the UK can they then be sold to customers via Amazon’s website. As the goods are in the UK at the time of purchase by a UK customer, the place of supply will be the UK under the VAT Act 1994 s.7.

For the purposes of VAT for non-EU sellers if they don’t have a business establishment in the UK they will be treated as a Non-established taxable person (NETPs).

If an NETP makes ANY sales, it has to register for VAT.

Therefore, all the criteria will met for VAT to be charged on sales under the VAT Act 1994 s.4, and registration for VAT for non-EU sellers will require the collection of 20% output VAT in their fixed prices charged to customers. They’ll then need to  pay this 20% to HMRC, although they can offset the related input or import VAT.

Please contact us for further information as there are a number of tax issues and court cases to be considered. For example, we recently wrote a very long memo on similar VAT and tax issues for a non-EU client.

If your business doesn’t have to pay much input VAT on its purchases, then it could make an extra profit using the flat rate VAT scheme. So even if it isn’t compelled to register as turnover is below £81,000 it could still be a good idea to register voluntarily.

Please refer to the free pdf report for full details and the key points are summarised below:

The flat rate scheme simplifies the VAT process and reduces the level of administration involved. You only have to include sales in the VAT return and don’t need to include your expenses.

To qualify, you need to have net taxable income (excluding VAT and non-UK sales) < £150k and you have to leave the scheme if total gross income (including VAT and non-UK) > £230k.

You collect 20% VAT on sales invoices from customers as normal, but you only pay the flat rate percentage on gross income to HMRC.

For example, for “Computer and IT consultancy or data processing” businesses, the rate of overall VAT is 14.5%. (with a 1% reduction to 13.5% in the first year for new VAT registrations). If annual sales before VAT are £40k, you collect 20% VAT from customers which is £8,000. But under the flat rate scheme you only pay 14.5% of the gross £48,000 = £6,960 which gives an extra profit of £1,040.

However, you cannot reclaim input VAT on purchases apart from on large capital items costing more than £2,000 incl VAT.

If you need help to register or maintain a flat rate VAT scheme then please contact us for a quote.