New business – when is the best time to register for VAT?

July 23rd 2019

You have identified a new business opportunity that you want to keep separate from your main business. What should you consider regarding your VAT recovery if you don’t want to register straightaway? VAT expert John Craig advises.

You can voluntarily register for VAT at any time if you are either making or intend to make taxable supplies. But don’t forget that taxable supplies relate to goods or services that you sell which will be subject to VAT at 0%, 5% or 20%. It does not include sales that are exempt from VAT.

Robert purchased a website domain for £5,000 plus VAT in May 2018 which he intends to use in the future to sell goods online. The expenditure is clear evidence of his intention to make taxable sales, so he can voluntarily register for VAT and claim input tax on this expense and other costs.

It is often assumed that there is a strict time limit between when you register your business for VAT and then make your first ‘taxable sale’, outside of which you will be de-registered automatically. This is incorrect and you can keep your VAT number as long you want, assuming there is always a clear intention to trade in the future.

Four-year window
What is the situation if Robert decided not to register for VAT when he started his business because he wanted to see how things developed? His input tax opportunity has not been lost because the legislation allows a business to retrospectively register on a voluntary basis by going back up to four years.

The disadvantage for Robert is that he will need to account for output tax on any standard rated sales he has made during the backdated period. This might cause him a problem if there is no scope to recover this VAT from his customers, e.g. because they cannot claim input tax.

Past sales will be treated as VAT inclusive, so output tax will be payable based on a sixth of the amount received, rather than the higher figure of 20%.

Six-month input tax window
There is another opportunity as far as your date of VAT registration is concerned, which is to register up to six months after you set up your business and still be able to claim input tax on your start-up costs.

This approach takes advantage of the pre-registration input tax rules, meaning you can claim input tax on the purchase of stock or assets bought within the last four years, as long as you still own them on your first date of registration and they have been used in your business during that time. Also the time limit for services is capped at six months before the date of registration.

Robert purchased his website domain on 1st May 2019 and made his first sales online in August 2019 but is trading below the compulsory annual registration threshold of £85,000. If he delays his VAT registration date until 1st November 2019 he can still claim input tax on his start-up costs because they are within the six month window and he has also avoided an output tax liability on goods sold between August and October 2019.

Check that your chosen date of VAT registration for your new business gives you maximum input tax recovery on costs and a minimal output tax liability on your sales. You can voluntarily register for VAT going back up to four years. Sales during that period will be subject to output tax but restricted to a sixth of the proceeds.

We hope that you find this article useful, if you are planning a new business venture and would like advice about the best time to register for VAT then please do not hesitate to contact me or one of the team at JRW.