VAT registration can be dangerous – August 2013

VAT is probably the most dangerous of all the taxes for a small business, firstly because it is charged on turnover, not profit, so any mistakes can be expensive; secondly because most penalties are tax-geared; and thirdly because there are very tight deadlines for providing information to HMRC - a trader certainly cannot leave it all for his accountant to sort out at the end of the year.

There are dangers both if you are not yet registered for VAT, and if you are:

If you are not already registered for VAT

The basic rule is deceptively simple - you must register as soon as your ‘taxable supplies’ exceed the registration threshold, currently £79,000 a year. The first point to watch is that ‘taxable supplies’ include sales of goods and services that are VAT zero- rated, as well as those which are subject to VAT at the 20% standard rate or 5% lower rate. However, you do not have to count sales of capital assets used in your business. For example, a jobbing builder would have to total his charges to customers, but would not have to include the sale of his truck or cement mixer. Broadly speaking, then, unless you are making any VAT-exempt sales, your ‘taxable supplies’ for VAT registration purposes will be the same as your turnover for ordinary accounts purposes.

The second point is that the registration threshold is not necessarily £79,000 for your accounts year, it is £79,000 for the twelve months to the end of any calendar month. So it is essential to keep a month by month check on your cumulative taxable supplies for the last twelve months. It is of course entirely within the rules to limit your trading to avoid going over the registration threshold - a lot of small hairdressers close for an extra day a week for this reason.

Otherwise, the registration application should be submitted within 30 days of the end of the month in which the twelve-month rolling total of taxable supplies first exceeded £79,000. If it is not, a penalty will be charged, usually of between 15% and 30% of the net VAT payable for the period from the date the business should have been registered, to the date it was in fact registered.

If there is a ‘spike’ in taxable supplies, so that they go over £79,000 for one twelve month period, but are likely to be less than £77,000 for the next, HMRC may (not necessarily will) agree that the business need not be registered. But you have to ask. If you take a chance and the VATman finds out, the business will be registered from the date it should have been registered until you in fact apply to deregister, with VAT payable on your sales, plus a penalty, for the whole of that period.

By the way, HMRC will not agree to allow a business to remain unregistered if the reason that taxable supplies in the coming year are likely to be less than £77,000 is that the proprietor intends to take an extended holiday.

If you are already registered for VAT

Obviously, you have to make your quarterly or monthly Returns on time, and pay the tax. All traders are well aware of that. Less obviously, a wide range of changes have to be notified within 30 days of their taking place. These include any change in the registered, legal or trading name of the business, its principal place of business, or its main business activity. If the business is carried on by a partnership, the admission of a new partner or the retirement of an existing partner must be notified, as must as any changes in personal details, such as a partner’s private address or name (for example, if a woman changes her name on marriage).

However, it is fairly unlikely that HMRC will in practice charge a penalty for failing to notify any of the above changes, at least in the case of an innocent error or oversight which does not lead to any loss or late payment of tax. The real danger is that a change may take place which means that the existing registration should be cancelled and the business re-registered. The most common examples are where:

  • A trader (or a partnership) incorporates his (their) business, as a company or a Limited Liability Partnership (LLP).
  • A sole trader takes on a partner (even where the new partner is, for example, his wife).
  • All but one of the partners withdraw from a business, leaving that business to be carried on by the last remaining partner as a sole trader. For example, this could happen where a married couple carried on business in partnership, one died, and the other continued the business as a sole trader.

Here, HMRC’s practice is to charge a penalty for failing to register the ‘post-change’ business. Their starting point will be to charge a penalty equal to 15% to 30% of the net VAT payable for the period from the date the change took place to the date it was finally notified - even if that VAT was in fact paid, on time, under the existing registration for the ‘pre-change’ business. It is usually possible to negotiate that penalty down, but frankly it is a situation far better avoided by deregistering and re-registering within the 30 days allowed.

To avoid VAT problems - which can be disastrously expensive - we would strongly advise that you ‘think VAT’, watch your turnover if you are not already registered, and keep us informed about changes in the structure or ownership of your business.

Please contact Colin Deegan or Sean O'Sullivan or your usual Beavis Morgan partner to find out more about how we can assist you and your business.