Any person who makes taxable supplies (i.e. that which is taxed at either the standard, lower or zero rates of VAT) but does not meet the conditions for compulsory registration is entitled to register voluntarily for VAT. Eligible individuals might make the choice to register for VAT for a variety of reason, such as improved cash flow or to project a more influential status.
However, most taxable persons are registered for VAT not for voluntary reasons but because they have triggered the conditions set for compulsory registration. There are two different conditions which must be reviewed to establish whether registration is required for a person receiving taxable income. The conditions are:-
If a threshold is exceeded, notification has to be made and any exemption applied for. Exemption can still be applied for even if notification was late but, following Shephard (1986) 2 BVC 208, 121, it will only be granted if:-
The VAT threshold announced in the 2007 Budget and operative from 1st April 2008 is £67,000. The value of the threshold usually increases annually in the Budget, and the government has pledged that the UK’s VAT registration threshold will remain one of the highest in the EC as a spur to the growth of small business.
Notification must be made within 30 days of the end of the 12-month period in which the annual past threshold was exceeded. Although there is no published concession extending the 30-day time-limit, in Lowinger Partners (1987) 3 BVC 1,324, indications were given by a Customs officer that HMRC might exercise their discretion and not assess in cases where the failure to notify was less than three months late.
A person must notify HMRC of his liability to register if (VATA 1994, Sch. 3):-
In deciding whether a person has exceeded a threshold, again the following supplies should be ignored:-
Subject to certain conditions, a person can correct on a VAT return certain errors which he made on one or more previous returns. The rules apply to errors both in favour of the trader and HMRC and apply whether the net effect is in favour of either party. If an error is adjusted in accordance with the conditions, no default interest arises.
The conditions for making such a correction are as follows:-
HMRC usually do not assess default interest if an under-declaration is no more than the limit and is correctly adjusted in the trader’s VAT account and included on the current return (Leaflet 700/45/March 2002, para. 4.2).
However, this practice applies only to under-declarations corrected on a VAT return. From 1 September 2008, default interest will be charged on voluntary disclosures of whatever amount if they are not adjusted for on a VAT return. See the section below dealing with voluntary disclosure.
A distance seller is a person who supplies goods and delivers them to an unregistered person in another member state. A distance seller must register (VATA 1994, Sch. 2) in the UK if:-
In deciding whether a person has exceeded the distance sales threshold, the following supplies should be ignored:-
At the end of each prescribed accounting period, every registered person must make a return to HMRC on the VAT 100 form provided, showing the amount of VAT payable (VATA 1994, Sch. 11, para. 2(1)). The return must usually be made not later than the last day of the month next following the end of the period to which the return relates and any VAT due for that period must accompany it. A prescribed accounting period is normally a period of three months.
Under VATA 1994, s. 25(1), it is possible for a taxable person to account for and pay VAT in accounting periods of other than three months.
Monthly returns have the effect of disclosing a VAT-registered person’s VAT liability to HMRC sooner than any other form of return submission. The use of monthly returns is therefore recommended only to those persons who are in a repayment situation (their input tax exceeds the output tax collected) e.g. exporters, food producers (whose supplies are taxed at the zero rate).
In certain cases, perhaps where the trader has been late in sending in his returns or where he has been connected with some business which has been in default with its VAT liabilities, HRC may insist that a trader actually submits monthly returns (Value Added Tax Regulations 1995 (SI 1995/2518), reg. 25(1)(c)).
Finance Act 2008, s. 115 and Sch. 37, introduced a new recordkeeping requirement that applies to all taxes administered by HMRC, including VAT. The new provisions:-
In addition, HMRC will provide guidance on the records that they would expect to find for particular types of business.
HMRC acknowledges that normal business records will generally be sufficient for satisfying the statutory requirement. It is not expected that the record keeping requirement for Vat purposes will change greatly from what was required prior to FA 2008. This is explained below.
Every taxable person shall, for the purpose of accounting for VAT, keep and preserve the following records:-
HMRC can add to this list for any trade or business of a description specified by them or for the purposes of any scheme established under the Act or regulations. They may also vary the terms of any notice either by issuing a fresh one or by issuing a notice which amends an existing one.
The records must be preserved for a period of six years, or such lesser period as HMRC may allow (Value Added Tax Act 1994, Sch. 11, para. 6(3)).
The VAT account is divided into separate parts relating to the trader’s prescribed accounting periods. These parts are divided into two portions – ‘the tax payable portion’ and the ‘tax allowable portion’. The tax payable portion comprises the total output tax payable for the prescribed accounting period, adjusted as required in accordance with reg. 34 and 38 and any other regulations made under the Act. The tax allowable portion comprises the total input tax allowable for the same prescribed accounting period, similarly adjusted.
For VAT purposes, the trader’s records must include records of all operations connected with his business which affect the amount of VAT which he has to pay or can reclaim.
Set out below are the guidelines published in Notice 700 (April 2002), para. 19.2.2:-
You must keep records of all operations connected with your business which affect the amount of VAT you have to pay or can reclaim.
You must also record adjustments such as:-
Under VATA 1994, Sch. 11, para. 6, HMRC can specify what records must be kept for VAT purposes and, after specifying that ‘taxable persons must keep and preserve certain records and accounts’, HMRC issued Notice 700 to amplify this general requirement. Some of the guidance provided in the notice is now included in the specific requirements of the Value Added Tax Regulations 1995, reg. 31.
Regulation 31(1)(a) refers to business records, examples of which are given in Notice 700 (April 2002), para. 19.2.3:-
HMRC have special powers under VATA 1994, Sch. 11, para. 3 relating to the production and transmission of VAT invoices by computer.