When you first start out in business, it’s common not to register for VAT, especially of your business operates in a retail or direct-to-consumer environment. In this environment, where VAT basically needs to be absorbed into the business cost base, delaying or deferring VAT registration can be quite helpful to the cash flow position of the business.
When does a business need to register for VAT?
Under normal circumstances, a business is liable to register for VAT when it’s turnover breaches the VAT threshold in a rolling twelve month period. The VAT registration threshold is currently £85,000. So, look back over your sales figures for the last twelve months. If these exceed £85,000 then you need to be registered for VAT. If they’re lower than £85,000, you don’t.
You also need to register for VAT if you KNOW you’ll exceed the threshold in the next month.
How long do you have to register after you’ve hit the threshold?
You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.
For example: if you breached the threshold on 16th December, you have 30 days from the end of December to register, and therefore the effective date of registration would be 1st February.
Re-setting the clock by incorporating the business
If you incorporate the business, then the twelve month clock is reset. Yuo don’t need to look back twelve months - you just need to look back to incorporation. This could mean that up to £84,999 of income can be kept out of VAT, saving potentially £14,167.
Timing is important though. Here’s why
When you incorporate a business and transfer it from a sole trader to a limited company, both are considered separate entities and so this would be classed as a Transfer of a Going Concern (TOGC). This means that IF the transferor (the sole trader) IS NOT a taxable person (i.e. VAT registered, or liable to be registered) at the time of the TOGC, the transferee (the new limited company) shall not be deemed to have carried on the business PRIOR to the transfer (i.e. the taxable turnover threshold resets).
But, if the transferor WAS registered, or more importantly, SHOULD have been registered, the the VAT clock does not reset and the new incorporated company will require to be registered from the date of transfer.
This is why timing of the incorpoation is so important: The transfer must take place before the sole trader business is liable to be registered for VAT, not after.
Conclusion
We don’t recommend going toe-to-toe with the VAT man, so it’s important, if you intend to incorporate, that you do it right. Getting professional advice is essential. It’s best to speak with an accountant or VAT expert for specific advice. Call our team on 03330 166559 or fill out the contact form.
