At what point does a business need to register for VAT? Daniel May, VAT Manager explains how to determine whether or not your construction business needs to declare your earnings to HMRC.
A UK- based business can make up to £85,000 of taxable supplies*, in other words, sales liable to the 20%, 5% or zero-rate of VAT, in a 12-month period before it is compulsorily obliged to register and charge VAT to its customers. The UK’s threshold is much higher than the average across the European Union. Many businesses selling to or serving customers that cannot recover VAT choose to operate slightly below the threshold to avoid the administrative and financial burden of registration.
To counter this, the VAT threshold has been at the current level of £85,000 since 1 April 2017 and was frozen further as part of the last Budget, until at least 2026.
A UK business must register if its total VAT taxable turnover for the last 12 months (‘look back’) was over £85,000, or it expects its turnover to go over £85,000 in the next 30 days alone (‘look forward’). It is worth noting that a business which is not established in the UK, is not usually able to use the threshold and will be liable to register as soon as it makes sales in the UK.
The look back test
Under the look back test, at the end of every calendar month a business must calculate its taxable turnover for the proceeding 12-month period. This calculation needs to be carried out monthly, on a rolling 12 month period basis.
Once the VAT threshold has been exceeded, the business must notify HMRC within 30 days. Its effective date of registration will start from the first day of the second month the threshold was exceeded.
For example – if the threshold is breached at the end of March, HMRC must be notified by 30th April, and VAT must be charged by the business to its customers from 1st June.
The look forward test
A business must register with HMRC immediately if it expects to exceed the threshold in the next 30 days alone – for example, by issuing an invoice with a value of over £85,000.
Where this happens the business must notify HMRC of the registration by the end of that 30-day period, and its effective date will be the date the expectation arose, not the date the income was received.
A business may choose to register before it reaches the threshold. The main reason for doing so would be to recover input VAT on
its costs if it makes supplies to registered businesses, customers based overseas only, or makes zero rated supplies. However, a business may also choose to register to give customers the impression that the business is bigger than it is.
*Purchases of services from overseas which would be subject to the reverse charge (and items subject to the UK domestic reverse charge) are classed as a deemed supply and must be added to the taxable turnover when assessing the threshold. Also included is the sale of land which has been subject to an option to tax, but not the sale of other capital assets, or income which is exempt or outside of the scope of VAT.
If your construction business needs VAT advice please get in touch with Daniel by calling 0330 058 6559 or emailing email@example.com