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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, answers an important question for small businesses.As businesses approach the VAT registration threshold they are often concerned that they should register on time to avoid late registration penalties, while at the same time making sure that they don’t register to soon it they deal with the public who can’t recover any VAT they are charged.

So what actually counts towards your taxable turnover?

Currently, the VAT registration threshold is £58,000 per annum (from 1 April 2004). This is measured on a ‘rolling’ twelve-month basis, so you have to continually monitor your turnover.

So what is taxable turnover?

The legislation says that taxable supplies are any supplies of goods or services in the UK that are not exempt. This means you can exclude any property rental income, and anything to do with insurance and financial services, health, betting and gaming, undertakers etc.

This is fairly straightforward, but there are a number of other items that can also be ignored from your taxable turnover for registration purposes. You can ignore the sale of capital assets of the business (excluded is the sale of ‘new’ – i.e. less than three years old – commercial buildings). Capital assets can be tangible or intangible and include plant, machinery, premises (if more than three years old) office machinery and furniture, computers, patents, company vehicles etc.

In addition to this, there is a facility for Customs to ignore one-off large transactions that distort the normal picture. For example, you run a business as a printer and normally turnover £45,000 p.a. The general election comes along, and a political party asks you to print a large number of posters for them that increase your turnover by an extra £20,000 in one month. Your turnover then falls back to normal. In theory, you have to register for VAT as you have exceeded the £58,000 registration limit. However, under para 1(3) of Schedule 1 of the VAT Act 1994, if you can show Customs that your turnover will probably fall below the £56,000 deregistration limit, you can avoid registering for VAT. You will have write to Customs and obtain permission, but will still have to monitor your turnover in the future to see that it exceeds the registration limit.

One pitfall to look out for when buying a business from someone is that you still have to look at the previous twelve months’ turnover, not just the turnover from the time that you bought it.

You also have to include what are known as ‘reverse charge’ services in your taxable turnover. So if you have accountancy, legal, advertising or consultancy costs etc from outside the UK, you have to add the value of these supplies to your own turnover, and if it puts you over the VAT registration threshold, you have to register for VAT and charge and reclaim the VAT on the value of these supplies. This is unlikely to effect most small businesses, but it can have surprising effects. For example, moving abroad is now very popular, and a number of companies have sprung up helping people move overseas. For example, I set up a business that supplies furniture and fittings etc to people moving to Spain. The company is UK-based, but I buy the goods from the Far-East and import them directly into Spain, having subcontractors deliver the goods etc. As a result, I register for VAT in Spain, but have no office of my own there. I hire an advertising and marketing company to approach tourists in Spain and they charge me £60,000 during the course of the year for the advertising in Spain. This is a reverse charge service and makes me liable to register for VAT in the UK, even though all my ‘real’ sales happen in Spain.

When to register?

You monitor your turnover, and find that it exceeded £58,000 at the end of May. You then have 30 days to notify Customs, who will register you from 1 July. To that extent, you are allowed one more month’s turnover free of VAT.

January 2005

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc