Bee’s sales are all standard rated.
On 1 January 2014 Bee realised that her sales for January 2014 were going to exceed £95,000, and therefore immediately registered for VAT.
- Businesses must register for VAT if at any time they expect their taxable supplies for the following 30-day period to exceed £79,000.
- Bee realised that her taxable supplies for January 2014 were going to be at least £95,000. She was therefore liable to register from 1 January 2014, being the start of the 30-day period.
- Bee had to notify HM Revenue and Customs by 30 January 2014, being 30 days from the date that the expectation arose.
If a business continues to trade after the date that it should have registered for VAT, then output VAT will still be due from this date.
It is important that you appreciate the distinction between making standard rated supplies, zero-rated supplies and exempt supplies. Only standard rated supplies and zero-rated supplies are taxable supplies.
Cathy will commence trading in the near future. She operates a small aeroplane, and is considering three alternative types of business. These are (1) training, in which case all sales will be standard rated for VAT, (2) transport, in which case all sales will be zero-rated for VAT, and (3) an air ambulance service, in which case all sales will be exempt from VAT.
For each alternative Cathy’s sales will be £80,000 per month (exclusive of VAT), and standard rated expenses will be £15,000 per month (inclusive of VAT).
Standard rated supplies
- Cathy will be required to register for VAT as she is making taxable supplies.
- Output VAT of £16,000 (80,000 x 20%) per month will be due, and input VAT of £2,500 (15,000 x 20/120) per month will be recoverable.
- Cathy can apply for exemption from registration for VAT since she is making zero-rated supplies, otherwise she should still register as these are taxable supplies.
- Output VAT will not be due, but input VAT of £2,500 per month will be recoverable.
- Cathy will not be required or permitted to register for VAT as she will not be making taxable supplies.
- Output VAT will not be due and no input VAT will be recoverable.
Voluntary VAT registration
A business may decide to voluntarily register for VAT where taxable supplies are below the £79,000 registration limit, or where it is possible to apply for exemption. This will be beneficial when:
- The business makes zero-rated supplies. As seen in example 4, output VAT will not be due but input VAT will be recoverable.
- The business makes supplies to VAT registered customers. Input VAT will be reclaimed, and it should be possible to charge output VAT on top of the pre-registration selling price. This is because the output VAT will be recoverable by the customers.
However, it will probably not be beneficial to voluntarily register for VAT where customers are members of the general public, since such customers cannot recover the output VAT charged. If selling prices cannot be increased, the output VAT will become an additional cost for the business.
Continuing with example 3, assume that Bee’s sales are all made to VAT registered businesses, and that input VAT for the period 1 October to 31 December 2013 was £12,400. This input VAT would not be recoverable were Bee to register for VAT on 1 January 2014.
- Bee’s sales are all to VAT registered businesses, so output VAT can be passed on to customers.
- Her revenue would therefore not have altered if she had voluntarily registered for VAT on 1 October 2013.
- It would therefore have been beneficial for Bee to have voluntarily registered for VAT on 1 October 2013 since additional input VAT of £12,400 would have been recovered.
Whether or not output VAT can be passed on to customers is also an important factor when deciding whether to remain below the VAT registration limit, or whether it is beneficial to accept additional work that results in the limit being exceeded.
Danny has been in business for several years. All of his sales are standard rated and are to members of the general public. He is not registered for VAT.
At present, Danny’s annual sales are £77,500. He is planning to put up his prices, and this will increase annual sales to £83,000. There is no further scope for any price increases. Danny’s standard rated expenses are £12,700 per year (inclusive of VAT).
- Prior to putting up his prices, Danny’s net profit is £64,800 (77,500 – 12,700).
- If Danny puts up his prices, then he will exceed the VAT registration limit of £79,000, and will have to register for VAT.
- Output VAT will have to be absorbed by Danny, as sales are to the general public and there is no further scope for price increases.
The revised annual net profit will be: