FORWARD LOOKING TEST
The main VAT registration test for an unregistered trader is based on traders checking historic sales on a rolling twelve-month basis to ensure they have not exceeded £85,000.
But there is also a second test to consider. You must register for VAT if your forecast taxable sales exceed £85,000 in the next 30 days alone. The registration date is the beginning of the 30-day period. This test ensures that large businesses have to register as soon as they start trading in the UK. For example, immediate registration applies to a large retailer opening a new UK shop as a separate limited company.
The 2018 Budget confirmed that the £85,000 threshold until remain until at least 2022.
Example. A major retailer based in London, is opening a Scottish store as a new limited company on 1 December 2018. The forecasts for monthly sales are exceeding £200,000. The new company will need to register for VAT in the UK by 1 December 2018 because it knows its taxable sales in the 30 days thereafter will exceed £85,000.
Practical point. You can also apply to be VAT registered when there is an intention to make future taxable sales. There is no time limit regarding the date of the first sale. This is an intending trader application and is often subject to verification. HMRC might want proof of business intentions before accepting the registration, e.g. business plans, contracts with potential customers etc.
The key phrase is “taxable” sales and not “total” sales as far as VAT registration is concerned. It is important that you ensure that any exempt sales or those outside the scope of VAT are excluded from the calculations. It is important to be clear about the difference between exempt, outside the scope and zero-rated sale. Include zero-rated sales in the calculations of taxable sales.
Practical point. If a sale is zero-rated, it means that VAT is still being charged but at a rate of 0%. This is different to exempt and outside the scope sales where no VAT is being charged. Supplies that are zero-rated are included in Schedule 8, Value Added Tax Act 1994. Examples of zero-rated sales include most food items, printed books and newspapers, new homes and exports of goods outside the EU.
Example. Colin is a management consultant with business clients in both the UK and America. He also rents out part of his office to another consultant. Colin's fees from the American clients will be outside the scope of VAT as the place of supply is the USA and not the UK. This is known as the general B2B rule in para 6.3 of VAT Notice 741A. The income from the rent is exempt from VAT if Colin has not exercised an option to tax. So his only income that counts as far as the VAT registration threshold is from the UK consultancy work.
Practical problem 1. In a bizarre twist to the rules, most services purchased from abroad by traders are also included as taxable sales. These are known as “deemed supplies”. For example, if a firm of accountants has annual income of £80,000 from UK clients and uses the services of an India-based bookkeeper to help with its work, paying the Indian firm £10,000 each year, then its total taxable sales are £90,000, triggering compulsory registration.
Practical problem 2. If a business takes over a business as a going concern, they must take into account the taxable sales of the seller. In determining their own date of VAT registration, they must treat those sales as their own for the previous twelve months. This will often mean that they must register for VAT from their first day of trading.
AVOID VAT REGISTRATION?
If the taxpayer has two or more distinct business activities, they could look to take advantage of a business splitting arrangement to ensure that neither business exceeds the threshold in isolation. The basic way to do this is to incorporate one of the businesses and run it through a company, whilst maintaining the other in an unincorporated business. However, you have to take steps to ensure this is a genuine split and not just a sham to avoid VAT registration. HMRC will ignore any split unless it is convinced the arrangement is genuine. To maximise the chances of success, ensure the following to avoid overlap and grey areas:
- each business should have its own bank account and accounting system and trade under its own name
- recharging of shared expenses paid by one business to the other; and
- there is no overlap with suppliers.
There is a particular issue with HMRC where there are family members involved, e.g. where a husband runs one business and the wife runs the other. However, the recent case of G & C Belcher v HMRC  TC05891 which upheld the business splitting argument for a former husband and wife partnership should add some weight to a counter argument.
VOLUNTARY VAT REGISTRATION
Businesses may already be making wholly or mainly zero-rated sales, e.g. a book retailer, or be working for customers who are VAT registered and able to claim input tax. It might be worthwhile for these businesses to register for VAT on a voluntary basis and claim input tax on their own costs.
There is no minimum level of sales required before a business can be voluntarily registered, so a business with annual sales of £50 from selling books online is entitled to be VAT registered.
Practical point. You can backdate an application for voluntary registration for up to four years. But businesses have to account for output tax on any standard-rated sales made during the retrospective period although a VAT only invoice can usually be issued to (and accepted by) clients who can claim input tax.
VAT REGISTRATION - EXCEPTION
What is the situation if businesses usually trade below the £85,000 threshold but get a one-off big order or sale that means they exceed the threshold on a temporary basis?
An example of this situation could be a labour-only builder who accepts a job where he also supplies materials for a customer, e.g. an extension to a house.
To request an exception by writing to HMRC’s VAT Registration Unit within 30 days of exceeding the limit.
Practical point. You need to fully explain why the breach of the threshold was a temporary state of affairs and why taxable sales are expected to be less than £83,000 (the deregistration threshold) in the twelve-month period thereafter.
Example. Colin earns fees from his UK consultancy work of £60,000 and is not VAT registered. In July 2018 he accepted a one-off lucrative TV engagement worth £40,000, a one-off, meaning his taxable sales were £100,000 in the twelve-month period ending 31 July 2018. Because many of his clients are partially exempt and unable to claim input tax, Colin wants to avoid being VAT registered. Colin should apply for an exception to being registered for VAT.
Practical point. If businesses do not meet the 30-day time limit to apply for an exception, then HMRC will accept a belated request on a retrospective basis. But the challenge is not to quote actual sales made by the business after it exceeded the threshold but to focus on why the business knew at the time of exceeding the threshold that their taxable sales in the following twelve months would be less than £83,000.
VAT REGISTRATION - EXEMPTION
Many traders will get confused with the difference between an exception to being VAT registered and an exemption. The latter is relevant when a business has exceeded the threshold (and will continue to exceed the threshold) but mainly or wholly makes zero-rated sales, i.e. their VAT returns will usually be repayments.
Businesses wanting a VAT exemption will be sacrificing the opportunity to claim input tax. This will help avoid compliance with the record-keeping and other responsibilities of being registered, which is likely to be a major attraction to businesses.
Practical point. A business already VAT registered and submitting repayment returns, might take the opportunity to apply for exemption. This might be particularly relevant going forward when businesses might want to avoid having to digitalise their record keeping after April 2019 with the introduction of Making Tax Digital.
DEREGISTRATION - COMPULSORY
Traders must deregister if the business has ceased to trade, with the date of cessation being the deregistration date. A business must deregister if it is a limited company and is joining a VAT group; or where the company is sold as a going concern and is now under new ownership. The best way to do this is to complete Form VAT7 online.
DEREGISTRATION - VOLUNTARY
If a business expects their taxable sales to be less than £83,000 in the next twelve months, they can apply for deregistration. The application for deregistration is only valid if applied for with a current or future date.
Example. Janet is a sole trader hairdresser and her accountant has just completed her accounts to 31 March 2018 - it is now 30 November 2018. Her taxable annual sales in that year fell from £90,000 to £80,000 as a result of Janet working fewer hours. Janet can apply for deregistration from today or later but she cannot apply for a retrospective date. This is because she is a taxable person until the time when she deregisters.
Practical point. There is no problem with deregistering part way through a month. Business will need to submit a final VAT return that covers the period from the previous return up to deregistration. However, it tends to be more practical to deregister at the end of a calendar month.
STOCK AND ASSETS TRAP
Before businesses deregister, it is important to consider the potential output tax that might be payable on the final return. This is in relation to stock and assets still owned on the date of deregistration. However, there are some opportunities to minimise this figure and hopefully avoid a problem.
Output tax is based on the market value of the asset at the time of deregistration and not the cost. This is good news for most assets, which tend to depreciate in value. The exception is property of course.
If no VAT charged on the original purchase of the asset then no output tax is payable on deregistration. There is also no output tax due on zero-rated items, e.g. most food stock for a grocery or catering business.
There is no liability to pay Output tax if input tax was blocked on the original purchase of the item. Input tax will have been blocked on a new car or goods that were wholly used for exempt activities by a partially exempt business.
If the total market value of all stock and assets remaining after the above exclusions is less than £5,000 excluding VAT, then no output tax is payable.
Practical point. A planning tip is for businesses to sell some of their stock and assets before they deregister. Doing this ensures the market value of assets owned on the date of deregistration are under the £5,000 limit.
CLAIMING INPUT TAX AFTER DEREGISTRATION
Businesses might want to retain their VAT registration number after they have ceased to trade. They may still have some outstanding expenses to pay that relate to the business, e.g. accountancy and professional fees. And they want to claim input tax on these.
This approach would be incorrect and the way of claiming VAT on post- trading expenses is by completing Form VAT427 and sending it to HMRC. Traders must use this form to claim bad debt relief after deregistration.
Practical point. An expense claimed on Form VAT427 must relate to a period when the business was VAT registered. So if Janet deregistered on 30 November 2018, she could claim input tax on her telephone bills up to then. A claim can be lodged even if the invoices aren't issued until December or even later. But she could not claim input tax on any expenses relevant to December 2018 or later.
The input tax claims need also consider any partial exemption issues that might arise. You can only claim VAT on expenses relevant to taxable sales.
If you need further advice on this then please contact Angus Nicolson.
VAT is a very complex area, and you should always take specialist advice before making any major decision.
We have a track record of providing good, robust, advice to clients to avoid problems arising and we have represented clients at VAT Tribunals.
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