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  • VAT registration pitfalls – one business or two (or three!), sir?

    30 November 2021

    Keith Miller

    As you are probably aware, UK entities (I will come back to this) are only required to register for VAT in the UK if their ‘taxable turnover’ (I will come back to this, too) exceeds the VAT registration threshold, which is currently £85,000.

    There are two main routes to compulsory VAT registration.  The most common is the ‘backward look’, where VAT registration is required when, at the end of a calendar month, total taxable turnover in the last 12-month period exceeds the VAT registration threshold.   Where this applies, VAT registration will begin on the first day of the second month after the month the threshold was breached.  e.g. if taxable turnover first exceeds the VAT registration threshold in the 12-month period ending 30 November 2021, the taxpayer will be required to register with effect from 1 January 2022.  So those having to register under the backward look effectively get an extra VAT free month before they become registered.

    The other way is if, at any time, it is expected that taxable turnover generated will exceed the VAT registration threshold (not over a 12-month period).  If this applies, VAT registration takes effect from the date the expectation arose.  The forward look exists to make sure that those taxpayers who expect to have turnover much higher than £85,000 per year (higher than £85k per month, in fact) cannot benefit from any ‘VAT-free period’ that would arise if the backward look was the only test.

    Apart from the mathematical tests that have to be applied to determine whether a VAT registration is required, there are other considerations that are just as important.

    One of these is that it is the ‘entity’ that is VAT registered, not the ‘business’.  So, when a corporate entity such as a limited company or an LLP is considering whether it needs to register for VAT, it must consider taxable turnover from all its activities, even if it has many varied activities.

    The same rules apply to individuals and partnerships.

    I’ve come across many sole traders who have only considered some of their activities as being ‘their business’, ignoring other activities that they carry out in their own name.  

    For example, a client had a small shop-based business whose turnover was below the VAT threshold.  He also bought and sold gold and silver as well as trading in other unconnected miscellaneous sales of c.£60k but saw these activities as separate to his primary business and therefore would not count towards his taxable turnover for VAT purposes. The combined turnover exceeded the VAT registration threshold and we had to advise him that it all had to be considered (and that he should have registered for VAT).

    Another consideration that needs to be taken into account is that it is only ‘taxable’ turnover that counts towards the VAT registration threshold, so any income that is VAT exempt or outside the scope of VAT should be disregarded, which takes us back to our businessman who’d failed to consider the sale of gold and silver and misc. items.   Certain sales of investment gold are VAT exempt, so there was the possibility that some or all of his gold sales would be VAT exempt and thus disregarded when considering his requirement to VAT register.  This could have offered another way out of having to VAT register, but there is no such exemption for silver, and the value of silver sales alone, when combined with other taxable income from his business and the miscellaneous sales, exceeded the VAT threshold (which would have been exceeded even without the silver sales).

    One more point to bear in mind when considering whether a UK VAT registration is required is that the value of ‘taxable’ services acquired by a UK business from a non-UK service provider should be added to UK taxable turnover when considering whether the VAT registration threshold has been breached.

    The reason for this is that where a UK VAT registered business buys taxable services from a non-UK business, they are required to ‘self-charge’ UK VAT on the value of services bought in.  The point of applying this ‘reverse charge’ VAT to services bought in from non-UK service providers is to put them on a level playing field with UK providers (who would have to charge UK VAT on their services).  

    To complete the ‘level playing field’, UK VAT registered entities that buy services from outside the UK can only recover this VAT if the services bought in are attributable to taxable supplies they make (under the same rules that determine the recovery of VAT charged by UK suppliers).

    The same rules apply to non-VAT registered businesses by treating the value of such ‘reverse charge’ supplies as taxable turnover, so if a UK taxpayer generated taxable income of £80,000 and bought £10,000 worth of services from a non-UK provider, they would be liable to register for UK VAT because the aggregate (£90,000) exceeds the VAT registration threshold.

    In fact, it is possible for a taxpayer to make no taxable supplies yet still be liable to register for VAT.  For example, financial intermediary companies often have wholly VAT exempt income streams, but also have a high advertising/marketing spend, with providers often located outside the UK.  If the annual non-UK advertising spend exceeds the VAT registration threshold, they will be liable to register for UK VAT.   

    Because they make no taxable supplies, no VAT is recovered, which is why wholly exempt businesses are required to register for VAT, to pay over this VAT.

    Beware of the pitfalls!

    For any VAT related queries please contact Keith Miller.

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