Because of exceptional circumstances your business turnover has exceeded the VAT registration limit. You’re sure that this won’t be repeated. Must you register and wait to deregister when your turnover falls or is there an alternative?
Know your limits
You probably know that if the value of goods and services you supply exceeds the registration limit you’re required to register for VAT. There are two tests that you must consider.
The first looks at turnover (unless it’s exempt) in the last twelve months. The second looks at turnover in the next 30 days alone. The registration trigger is £85,000 in each case. There are exceptions and we consider these next.
If your turnover is steady and always below the VAT registration limit except for a one-off sale that exceeds it, you should send a VAT registration application (VAT1) to HMRC. However, you may still be able to avoid registration.
Tip. You’re liable to an HMRC financial penalty for failing to register on time. You have 30 days from the time the registration limit is exceed.
It’s not repeatable
While it might seem unfair that you have to register for VAT solely because of a one-off sale, that’s the rule.
However, if and when your turnover returns to its usual level, and this is less than the deregistration limit of £83,000, you can ask HMRC to cancel your registration.
Registration and deregistration
The trouble is dipping in and out of registration is a hassle. It involves hiking your prices to account for VAT, which might put off customers, and then reverting to not charging VAT. This means you’ll have to make changes to your invoicing and other bookkeeping processes. If you later cancel your VAT registration there will be disruption for you and your customers all over again.
Tip. The good news is that where an increase in your turnover is a one-off you can ask HMRC to waive the requirement to register.
While the rules don’t allow you to avoid registration just because you only exceeded the turnover limit temporarily, HMRC has the concessionary power to agree to it. You should write to HMRC explaining in as much detail as possible why you believe that your future turnover will be below the VAT deregistration threshold (£83,000 for 2023/24). There’s no special format for the letter, but as well as explaining the cause of the blip in your turnover you should, if possible, provide turnover projections for the twelve months following the date on which the registration limit was exceeded.
Tip. Where you’re asking HMRC to use its discretion to let you off registration, you don’t need to send a completed VAT 1 , but we recommend that you do as it provides information HMRC will want in order to consider your request.
Tip. HMRC will even consider waiving registration retrospectively where you realise that your turnover exceeded the registration limit too late, i.e. after the 30 days allowed.
Instead of registering for VAT you can ask HMRC to use its discretion to let you off. You’ll need to convince it that your VATable turnover in the following twelve months will be less than the deregistration threshold of £83,000. If you’re late realising that you’ve exceeded the registration threshold of £85,000, you can still ask HMRC to use its discretion.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.