Learning Outcomes
After studying this article, you will be able to identify when VAT registration is compulsory, explain the turnover threshold and calculation, distinguish between taxable, exempt, and zero-rated supplies, outline the process and timing for registration, and advise on the implications of voluntary registration. You will also understand the main post-registration obligations and be able to apply these principles to SQE1-style scenarios.
SQE1 Syllabus
For SQE1, you are required to understand VAT registration requirements from a practical standpoint. Focus your revision on:
- The compulsory VAT registration threshold and how taxable turnover is calculated
- The difference between taxable, exempt, and zero-rated supplies for registration purposes
- The process and timing for VAT registration (historic and future tests)
- The consequences of late registration and effective date of registration
- The option and implications of voluntary VAT registration
- Ongoing obligations after registration, including VAT invoicing and record-keeping
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the current VAT registration threshold, and how is it calculated?
- What is the difference between zero-rated and exempt supplies for VAT registration?
- When must a business register for VAT if it expects to exceed the threshold in the next 30 days?
- What are two main advantages and two disadvantages of voluntary VAT registration?
Introduction
Value added tax (VAT) is a tax on the supply of goods and services in the UK. Businesses that meet certain criteria must register for VAT and comply with related obligations. For SQE1, you must know when registration is compulsory, how the threshold is calculated, the difference between compulsory and voluntary registration, and the main post-registration requirements.
Compulsory VAT Registration
A business must register for VAT if its taxable turnover exceeds the registration threshold set by law.
Key Term: taxable turnover
The total value of all taxable supplies (excluding VAT itself) made in the UK by a business in a rolling 12-month period.Key Term: taxable supplies
Supplies of goods or services subject to VAT at the standard, reduced, or zero rate. Excludes exempt and outside-the-scope supplies.
The current VAT registration threshold is £85,000. This is not a fixed calendar year but a rolling 12-month period. Businesses must monitor turnover continuously.
The Historic and Future Tests
There are two main tests for compulsory registration:
- Historic test: If taxable turnover for the past 12 months exceeds £85,000, registration is required.
- Future test: If taxable turnover is expected to exceed £85,000 in the next 30 days alone, registration is required immediately.
Timing and Effective Date
If the threshold is exceeded under the historic test, the business must notify HMRC within 30 days of the end of the month in which the threshold was breached. Registration takes effect from the first day of the second month after the threshold was exceeded.
If the threshold will be exceeded in the next 30 days (future test), the business must notify HMRC by the end of that 30-day period. Registration takes effect from the date the business realised it would exceed the threshold.
Example
A retailer’s taxable turnover reaches £86,000 on 15 June (historic test). They must notify HMRC by 30 July, and registration takes effect from 1 August.
A consultancy signs a contract on 1 September for £90,000 to be delivered in 30 days (future test). They must notify HMRC by 30 September, and registration takes effect from 1 September.
What Counts Towards the Threshold?
Only taxable supplies count towards the threshold. Exempt supplies (such as insurance, most financial services, and some education or health services) are ignored.
Key Term: exempt supplies
Supplies of goods or services that are not subject to VAT and do not count towards the registration threshold. No input VAT can be reclaimed on costs related to exempt supplies.Key Term: zero-rated supplies
Taxable supplies charged at 0% VAT (e.g., most food, children’s clothing, books). They count towards the threshold, and input VAT can be reclaimed.
Worked Example 1.1
A bakery sells bread (zero-rated), cakes (standard-rated), and provides food services (standard-rated). In the last 12 months, it made £60,000 from bread, £20,000 from cakes, and £10,000 from food services. Must it register for VAT?
Answer: Yes. Both zero-rated and standard-rated sales are taxable supplies. Total taxable turnover is £90,000, exceeding the threshold. Registration is compulsory.
Voluntary VAT Registration
A business with taxable turnover below £85,000 may register for VAT voluntarily.
Advantages
- Can reclaim input VAT on purchases and expenses
- May improve business credibility with suppliers and customers
Disadvantages
- Must charge VAT on sales, potentially increasing prices for non-business customers
- Must comply with VAT record-keeping and return requirements
Worked Example 1.2
A freelance designer earns £40,000 per year from business clients. She registers for VAT voluntarily. What are the main implications?
Answer: She must charge VAT on her services, submit VAT returns, and can reclaim input VAT on business expenses. Her business clients can usually reclaim the VAT, so pricing is not affected for them.
Registration Process and Post-Registration Duties
How to Register
Registration is usually completed online with HMRC. The business provides details of its activities, turnover, and bank account.
Effective Date of Registration
The effective date is set by law based on when the threshold is exceeded or expected to be exceeded. From this date, the business must:
- Charge VAT on all taxable supplies
- Issue VAT invoices with the business’s VAT registration number
- Submit VAT returns (usually quarterly)
- Keep VAT records for at least six years
Key Term: VAT invoice
A document issued by a VAT-registered business showing the amount of VAT charged, the VAT registration number, and other required details.
Record-Keeping and Returns
Registered businesses must keep records of all sales and purchases, VAT invoices, and VAT account records. VAT returns must be submitted to HMRC, usually every quarter, showing output VAT (on sales) and input VAT (on purchases).
Partial Exemption
If a business makes both taxable and exempt supplies, it may only reclaim input VAT on costs related to taxable supplies. Special rules apply for calculating recoverable input VAT.
Penalties for Late Registration
Failure to register on time can result in penalties, interest on unpaid VAT, and assessment of VAT due from the effective date of registration.
Exam Warning
If a business exceeds the threshold but fails to register, it must pay VAT on all taxable sales from the date registration should have taken effect, even if VAT was not charged to customers. Penalties and interest may also apply.
Deregistration
A business must deregister if it stops making taxable supplies or if taxable turnover falls below the deregistration threshold (currently £83,000) and it applies to HMRC.
Key Point Checklist
This article has covered the following key knowledge points:
- VAT registration is compulsory if taxable turnover exceeds £85,000 in any rolling 12-month period or is expected to do so in the next 30 days.
- Taxable turnover includes standard, reduced, and zero-rated supplies, but not exempt supplies.
- Registration must be notified to HMRC within set deadlines; the effective date is set by law.
- Voluntary registration is possible below the threshold, with both advantages and disadvantages.
- VAT-registered businesses must charge VAT, issue VAT invoices, submit VAT returns, and keep records.
- Failure to register on time can lead to penalties and backdated VAT liability.
Key Terms and Concepts
- taxable turnover
- taxable supplies
- exempt supplies
- zero-rated supplies
- VAT invoice
