For smaller businesses and sole traders, VAT can be complicated issue. Knowing when is right, or required, to register can be difficult.

When does a business need to register for VAT?

A business must register for VAT when its taxable turnover exceeds the VAT registration threshold, which is currently set at £85,000.

However, a business can register for VAT voluntarily if its taxable turnover is below the threshold. Taxable turnover is income that would be subject to VAT at 0%, 5% or 20%. It does not include exempt income or income that is outside the scope of UK VAT.

A business must notify HMRC within 30 days of the end of the month in which the threshold is breached. For example, if the business breached the VAT registration threshold on 08 April 2019, it must notify by 30 May 2019.

The VAT registration date will be the first day of the second month after the business went over the registration threshold. So in this example, the VAT registration will be effective from 01 June 2019 unless an earlier date is chosen.

When should a business start charging VAT?

The business must charge VAT from the effective VAT registration date – this is selected during the application process. If the effective date of VAT registration has been backdated, then VAT is declared on all sales made following the effective registration date.

Some businesses wrongly assume that they do not charge VAT until they have received their VAT registration certificate in the post. However, this can take up to 30 days, at which point they may have undercharged VAT for several weeks.

What happens if you don’t register for VAT on time?

If the business fails to notify HMRC on time, HMRC may issue a penalty. Penalties for failing to VAT register on time are calculated as a percentage of the VAT due, with the percentage increasing depending on the time that has elapsed between the date from when the business should have notified and the date HMRC receives the application.

The penalty percentage is 5% if the business registered for VAT no more than 9 months late, 10% between 9 and 18 months late and 15% more than 18 months late.

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Adrian Farrimond