Freelancer’s Question: When precisely is VAT due and do I need to register to pay it with HM Revenue & Customs?
Expert’s Answer: VAT is a tax on consumer expenditure and is ultimately paid by the final customer. Most business transactions involve the supply of goods or services and VAT is payable if they are made:
a) In the United Kingdom
b) By a taxable person
c) In the course of furtherance of business and are not specifically exempted or zero-rated
VAT is collected by HM Revenue & Customs and is normally payable quarterly.
There are two different types of registration – compulsory and voluntary:
A person who makes taxable supplies becomes liable to be registered if:
a) At the end of any month, the value of his/her taxable supplies in the period of one year then ending has exceeded the registration limit, which is £73,000 from April 1st 2011
b) At any time, there are reasonable grounds for believing that the value of his/her taxable supplies in the next 30 days will exceed the £73,000 limit
c) If, where a business carried on by a taxable person is transferred as a going concern, the taxable supplies for the 12 months prior to the transfer exceed £73,000
In the most common situation – a) – the person most notify HMRC of the liability within 30 days of the end of the month in which the value of the taxable supplies first exceeded £73,000.If, for example, the value of the taxable supplies first exceeded £73,000 in the 12 months to March 31st, then HMRC must be notified by April 30th and VAT registration would commence on May 1st.
In certain circumstances, it is possible to register on a voluntary basis for VAT even though the value of taxable supplies may never exceed £73,000. This is normally only beneficial where the majority of the supplies are being made to customers who are themselves VAT registered, e.g. it would not be beneficial for a domestic painter with taxable supplies of £30,000 to be registered, whereas it may be beneficial for a commercial or industrial painter with the same level of supplies.
The other situation in which voluntary registration might be beneficial is where the supplies are all zero-rated and no VAT is charged on the transaction. All VAT suffered by the trader on expenses can be reclaimed from HMRC.
In summary, the advantages and disadvantages of a voluntary VAT registration are as follows:
· Enables input VAT suffered to be reclaimed;
· A VAT number can give the impression that a business is larger than it actually is which sometimes can increase the possibility of obtaining work
· The requirement to prepare VAT returns on a quarterly basis and to submit them and if applicable pay over the VAT due within one month of the quarter end. Is the amount of work involved worth it for the amount of input VAT that can be reclaimed?
· HMRC may visit the business about every five years to ensure that VAT is being properly accounted for. There may be penalties for incorrect returns.
Lastly please note that, for better or worse, since April 2011, all VAT-registered businesses with a turnover of £100,000, alongside all new registrants of the tax, are required to file VAT returns and make VAT payments online.
The expert was Martin McKechnie, of The Low Tax Group, whose comments were excerpted from its guide to financial, tax and accounting considerations for starting a successful business - The New Business Kit.