A Complete Guide to VAT Registration in the UK

Value Added Tax (VAT) is a tax levied on the value added to goods and services at each stage of production or distribution. In the United Kingdom, VAT is an essential aspect of doing business, and it’s crucial for property businesses to understand when and how they should register for VAT.

Whether you’re a seasoned property investor or just embarking on your property business journey, understanding VAT is paramount.

In this comprehensive guide, we delve into VAT registration intricacies, from compulsory and voluntary registration to VAT schemes for businesses, shedding light on the registration process.

 VAT Registration

When a property business in the UK registers for VAT, it takes on the role of both a collector and a claimant.

his means that the business is responsible for charging VAT on its taxable sales (output tax) and can also reclaim the VAT it pays on its purchases and expenses (input tax).

Here are the two essential triggers that necessitate VAT registration for property businesses:

Exceeding the VAT Registration Threshold

If the total value of taxable supplies made by your property business in the previous 12 months exceeds the VAT registration threshold, which is currently £85,000 for 2023/24, you are required to register for VAT.

Reasonable Grounds for Exceeding the Threshold

If, at any time, you have reasonable grounds to believe that the value of taxable supplies to be made by your property business in the next 30 days alone will exceed the VAT registration threshold, you must also register for VAT.

Voluntary VAT Registration

While the above criteria outline compulsory registration, it is possible for property businesses with taxable turnover below the threshold to voluntarily register for VAT, and this choice can bring notable benefits.

Voluntary registration can enhance a business’s credibility, facilitating smoother interactions with other VAT-registered entities. Furthermore, it grants the ability to recover input VAT on purchases, leading to potential cost savings, and helps sidestep late registration penalties imposed by HMRC.

However, it’s essential to weigh these advantages against the downsides, including the requirement to charge VAT on sales, which can increase prices for customers, and the added administrative responsibilities of filing VAT returns on a regular basis.

Notifying HMRC

You must tell HMRC within 30 days after the month when the threshold limit is exceeded, or within 30 days of the day on which you realise that the supplies in the next 30 days will exceed the threshold.

This notification can be done by using the VAT online service. After notifying HMRC, you must start adding VAT to the sales starting from the first day of the next month.

Example: Exceeding the VAT Registration Threshold

Sarah commenced her business on 1 March with monthly taxable sales amounting to £12,000. She expects exceeding the registration threshold of £85,000 by the end of her eighth month in business, which is 31 October.

Sarah should notify HMRC about this by 30 November. Beginning 1 December, she should start applying VAT to her sales.

Example: Reasonable Grounds for Exceeding the Threshold

Pete’s annual taxable turnover remains below the VAT registration threshold, exempting him from registering for VAT. However, he recently received a substantial order worth £87,000 on 10 July, with plans to fulfil it over the next four weeks.

To meet VAT regulatory requirements, Pete must notify HMRC about this significant order within 30 days from 10 July, making the deadline 8 August.

Additionally, he is required to start applying VAT to his sales immediately, including the £87,000 order, ensuring that VAT is included on the sales invoice.

 VAT: Who Needs to Register

Determining whether VAT registration is necessary within the property sector depends on the nature of rental income. Residential landlords typically fall outside the scope of VAT registration, as income derived from residential properties generally qualifies for exemption.

In contrast, for those involved in commercial property rentals, VAT considerations arise, particularly if the property is opted for taxation.

On the other hand, property developers and construction companies, irrespective of whether their projects are residential or commercial, often find it advantageous to register for VAT. Their substantial outlays on materials, labour, and services present opportunities to recover VAT costs, potentially yielding significant savings and enhancing financial competitiveness.

Nonetheless, the decision to pursue VAT registration should be weighed carefully, considering the specific circumstances and financial impact on each business.

Additional Information for Property Developers

When it comes to VAT registration for property developers in the UK, the initial consideration is whether the property is opted for VAT or not. In addition to making the option to tax decision, property developers are required to complete a VAT5L form (VAT registration – Land and property) along with the standard VAT registration form.

Including property-related documents like planning permission records and site plans is advisable during this process.

Read our article on ‘VAT on Property Explained: A Complete Guide’ to gain insights into how VAT applies to your property.”

 VAT Taxable Turnover

The VAT taxable turnover plays a pivotal role in determining whether your business is required to register for VAT. In the UK, VAT registration becomes obligatory when your taxable turnover surpasses the VAT registration threshold, as explained above.

VAT taxable turnover is the total value of all taxable supplies made by your property business over a specific period. Taxable supplies encompass the goods and services that are subject to VAT at one of the standard (20%), reduced (5%), or zero rates, as determined by HMRC.

It’s important to note that not all supplies fall within the scope of VAT. Two notable categories are exempt supplies and supplies that are outside the scope of VAT:

Exempt Supplies

Exempt supplies, such as the rental income from residential properties, do not attract VAT. This means that you don’t charge VAT on such supplies, but you also cannot reclaim VAT on related expenses. Exempt supplies are different from zero-rated supplies, where VAT is charged at a rate of 0%.

Outside the Scope of VAT

Some transactions, such as land sales and certain financial services, are entirely outside the scope of VAT. Additionally, the sale of the business as ‘Transfer of Going Concern’ is also outside the scope of VAT. They do not involve VAT calculations or reporting.

 VAT Schemes

VAT schemes are tailored to streamline how VAT-registered property businesses calculate and report their VAT obligations to HMRC.

These schemes do not alter the actual VAT amount that businesses charge for their goods and services and are entirely optional to participate in.

Flat Rate Scheme

The Flat Rate Scheme, a simplified VAT accounting method, involves businesses paying a fixed rate of VAT to HMRC. It allows them to retain the difference between the VAT they charge their customers and the VAT they pay to HMRC.

However, businesses usually cannot reclaim the VAT on their purchases, except for certain capital assets exceeding a threshold of £2,000.

Annual Accounting Scheme

Under the Annual Accounting Scheme, businesses make advance VAT payments towards their VAT bill, determined either from their last return or estimated if they are new to VAT.

They submit just one VAT Return annually, and upon submission, they either make a final payment reflecting the difference between their advance payments and the actual VAT bill or apply for a refund if they have overpaid their VAT.

It’s worth noting that if your business frequently reclaims VAT, this scheme may not be suitable as you can only request one refund annually when submitting the VAT Return.

 VAT Registration Process

When the need arises for VAT registration, the process is designed to be straightforward and convenient, primarily conducted through an online registration portal.

To begin this process, you’ll require a Government Gateway user ID and password. If you don’t have these credentials, don’t worry – you can easily create them.

Information Required

The information and documents you need to provide vary based on your business type:

Limited Company

• Company name
• Details of turnover and nature of business
• Bank account details
• Company Registration Number
• Unique Tax Reference (UTR) number

Individual or Partnership

• Date of birth
• National Insurance number
• ID such as a passport or driving licence
• Bank account details
• Unique Tax Reference (UTR) number (if you have one)

Note: When registering for VAT, you must also consider which VAT scheme aligns best with your property business.

step 1

VAT Registration Confirmation

After successfully submitting the registration information, you can expect to receive a VAT registration certificate by post. Typically, this certificate is issued within 30 working days, although, in some cases, it may be received in as little as 10 working days.

step 2

Access VAT Dashboard

Upon VAT registration, businesses gain access to their VAT online account through their Government Gateway account. This dashboard serves as a central hub for managing VAT-related responsibilities, including submitting VAT returns and making VAT payments.

step 2

Manage VAT Obligations

Once registered for VAT, businesses must actively manage their VAT responsibilities. This includes charging VAT on sales, providing VAT invoices to customers, submitting VAT returns, and paying VAT owed to HMRC on time.

Maintaining accurate digital VAT records and a VAT account is essential, particularly in line with the Making Tax Digital (MTD) for VAT initiative.

Ease your burden, and let us handle the VAT registration for you

VAT REGISTRATION FORM

 Claiming VAT Before Registration

Here’s some good news for property businesses. You can recover input tax incurred before your VAT registration, which means you may be able to reclaim VAT on goods and services purchased or used for your business before you officially become VAT registered.

To qualify, there are specific conditions and timeframes to keep in mind:

• if you acquired goods for your property business within the previous four years and still own them at the registration date, or
• if services were supplied for business purposes in the six months before registration.

Property businesses can claim this input tax on their very first VAT return after registering for VAT. The timeframes for these rules run from the date of registration for the pre-registration costs.

Question: Is it possible to reclaim VAT prior to the incorporation of my company?

Absolutely, you can indeed claim VAT even before your company is officially incorporated. The above rule extends to input tax on goods and services that were utilised for business purposes prior to your company’s incorporation.

The key condition here is that the individual incurring these expenses should later become a member, officer, or employee of the company and receive full reimbursement from the company for these expenditures.

The timeframes for these rules commence from the date of your company’s registration, encompassing both pre-incorporation and pre-registration costs.

 Penalties for Late VAT   Registration

The penalty is determined based on the individual’s conduct and is calculated as a percentage of the ‘potential lost revenue’ (PLR).

The potential lost revenue refers to the net VAT amount owed for the period from when registration should have occurred until the day HMRC is officially informed of the obligation to register.

For penalty calculation, the landlord’s behaviour falls into one of the below categories:

Non-deliberate

If the taxpayer’s failure to register for VAT was unintentional, resulting from a lack of awareness or due to specific circumstances, they may be subject to a relatively lower penalty.

Deliberate but Not Concealed

When a taxpayer knowingly should have registered for VAT but chose not to, their behaviour is characterised as deliberate but not concealed.

Deliberate and Concealed

Taxpayers fall into the category of deliberate and concealed if they not only intentionally avoid VAT registration but also take active steps to conceal their actions from HMRC.

Note

Unprompted Disclosure: Disclosure is considered unprompted when the taxpayer has no grounds to suspect that HMRC has already uncovered or is on the verge of uncovering the non-compliance.

Prompted Disclosure: Disclosure is considered prompted when HMRC uncovers undisclosed VAT liabilities related to a business or transaction during a compliance examination.

Penalty Reduction

Penalties can be subject to reduction based on the quality of disclosure. The extent of the penalty reduction depends on the effectiveness of the disclosure provided. This reduction is applied to the difference between the maximum and minimum penalty rates within the applicable range.

This may involve responding to HMRC inquiries, facilitating their assessment process, or providing access to relevant records and documents as needed to ensure a more cooperative and transparent resolution

Deadline for Penalty Payment

The penalty for late VAT registration must be paid within a 30-day timeframe. This 30-day period commences from the date when the penalty assessment is officially issued.

For example, 

X Company started its property development activities on 1 July 2021, and exceeded the VAT threshold in March 2022, needing to register from 1 May 2022. They notified HMRC on 31 December 2022.

During the period from 1 May to 31 December 2022, X Company generated sales totalling £150,000, which are considered VAT-inclusive, implying that they should have included a 20% VAT component.

Unfortunately, proper documentation for purchases during this period was not maintained, which means that input tax recovery was not possible.

To figure out how much VAT they should have paid, we take £150,000 and apply standard rate of 20$, which is £25,000. That’s what we call ‘potential lost revenue.’

The penalty is determined as a percentage of this potential lost revenue. The maximum penalty, assuming this is non-deliberate, would be 30% of £25,000, resulting in a penalty of £7,500.

Notably, since the period between the date when VAT should have been paid and when X Company notified HMRC is less than 12 months, the penalty may be reduced, possibly to nil, due to the nature of the disclosure being unprompted.

 Making Tax Digitals (MTD)  for     VAT

MTD for VAT is a transformative initiative introduced by HMRC aimed at modernising and streamlining how VAT is recorded, reported, and managed in the UK. This digital approach represents a significant shift from traditional paper-based accounting methods to a more efficient and accurate digital system.

Under MTD, businesses must maintain digital records and submit VAT returns using compatible accounting software. This shift enhances accuracy, efficiency, and access to real-time financial data, ultimately simplifying the VAT process for businesses while ensuring compliance with HMRC requirements.

 VAT Deregistration

VAT registration for businesses is not always a permanent status, and there are circumstances under which a business may be compelled to deregister or can choose to do so voluntarily.

When a business deregisters for VAT, it must account for VAT on the final VAT return for any assets that are part of its business assets on the last day of registration.

These assets are treated as if they were supplied in the ordinary course of business, unless certain exceptions apply, such as

• The business being transferred as a going concern,
• The taxable person’s death, bankruptcy, or incapacitation leading to the business being carried on by another person, or
• If the VAT on the deemed supply is less than £1,000.

Compulsory Deregistration

Compulsory deregistration can occur when a business undergoes significant changes, such as the sale of the business itself, a change in its legal structure (e.g., transitioning from a sole trader to a limited company), or when it ceases to provide taxable goods or services and switches to making exempt supplies.

In such cases, HMRC must be informed within 30 days, and the deregistration becomes effective from the date of the relevant event.

Voluntary Deregistration

Voluntary deregistration is an option when a business anticipates that its taxable supplies in the upcoming 12 months will be less than £83,000. The deregistration takes effect from the date of notification to HMRC or a later agreed-upon date.

Conclusion

Although VAT regulations may appear complex, they are an essential requirement for property businesses operating in the UK. By engaging in careful planning, seeking guidance from tax experts, and leveraging digital resources, you can simplify the VAT registration procedure and ensure continuous compliance.

Ultimately, being VAT registered can provide opportunities for growth, access to VAT reclaims, and a solid foundation for financial stability.

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