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Vat Registration Question

CronerTaxwise

By CronerTaxwise

My client, without consulting me, VAT registered himself with an effective date of registration (EDR) 1 May 2018 on the basis that he had reached the VAT registration threshold. On preparing his latest accounts, I have identified that he did exceed the VAT registration threshold in May 2018, but it is my understanding that he is not required to be VAT registered until 1 July 2018.
Can you please confirm that my understanding is correct, and advise whether anything can be done to change the EDR now? As a sole trader builder, most of his customers are not VAT registered businesses, and he is not going to be able to pass on the VAT payable to HMRC.

A. The effective date of registration is calculated in two different ways depending on whether the threshold has been exceeded on the “backward look” based on  cumulative taxable supplies made  over a rolling 12  months period, or the “forward look”  based on taxable supplies made or  expected to be made over a period of 30 days alone.

The current threshold is £85,000.

HMRC expect that at the end of each month, a business will look back at the value of taxable supplies they have made in that month and add them to the value of supplies they have made in the previous 11 months, thus establishing their cumulative turnover value on a rolling 12-month basis.

Where a business has exceeded the VAT registration threshold within a period of 12 months or less (but not in a period of 30 days alone – see below) the business is required to VAT register.

A business is required to notify HMRC of the requirement to register by submission of a VAT 1 (VAT Application for Registration) to HMRC within 30 days of the end of the month in which the threshold was exceeded. The business will be registered with effect from the first day of the second month after their taxable supplies went over the registration threshold. In your case, you are correct, where the threshold was exceeded on the backward look in May 2018, the compulsory EDR will be 1 July 2018.

At this point, it is also important to note that where a business is required to be VAT registered based on the “backward look” they have the option to apply to VAT register voluntarily from an earlier date. This is generally only to be recommended where backdating will facilitate recovery of pre-registration input tax, and the business is supplying customers who would not have an issue if asked to pay VAT in addition to the net value of supplies they have already received. A business making or intending to make taxable supplies can backdate their EDR to a date up to 4 years prior to submission of the VAT 1 application to HMRC..

Where the registration threshold has been exceeded on the forward look, a business is required to submit the VAT 1 application to HMRC within 30 days of having the expectation that taxable supplies in excess of the registration threshold will be made in the next 30 days. The compulsory registration date will be the date the business first expected their taxable supplies to go over the registration threshold in a 30-day period. Note that once a business has exceeded the threshold on the forward look it is not possible to backdate the registration to a date earlier than the date of the expectation as above.

As to amending the effective date of registration to a later date, HMRC cover this point in their VAT registration Guidance VATREG25350 (VATREG25400 concerns changing the EDR to an earlier date). As they neatly summarise, requests are often made because of a business realising that they need not have VAT registered when they did. In limited circumstances, HMRC advises that they may permit a retrospective change to the EDR if there has been a genuine error in completing the VAT 1 by the person registering.

While the legislation regarding registration in VATA94, Schedule 1 does not allow the EDR to be varied once a business is registered, HMRC consider that their collection and management of the tax powers within Schedule 11 (1) do allow them some leeway to agree a change to the EDR where it would be unreasonable for them not to do so.

The criteria they consider when reviewing a request to change an EDR, as detailed in VATREG25350, are as follows:-

  • the EDR given must, at the time of registration, have been a backdated EDR. In other words, at the time of application, the trader voluntarily applied for an earlier EDR
  • the trader must demonstrate that there was a genuine misunderstanding or error in completing the application form. That does not include an error of judgement, for example, he thought he would be in repayment but found in fact he was a payment trader
  • the request must be made before the due date of the first VAT return (that is, one month after the end of the first period), which must not have been rendered.
  • the trader must return the original VAT 4 certificate.

HMRC do not expect the officer considering the request to work on the mechanistic basis that every business which does not meet all four of the change eligibility criteria must automatically have its change request refused.

The guidance advises HMRC officers that they “should consider each trader’s circumstances separately and think about how a First Tier Tribunal judge might regard those circumstances should the trader appeal against your decision to refuse the request.

The test of any decision is that it is reasonable and proportionate in all the circumstances of the case. It is important that you:

  • look at each case on its own merits
  • take account of all the relevant factors
  • don’t allow irrelevant factors to prejudice your judgement
  • weigh the impact (if any) granting the request would have on overall tax yield against the impact refusing the request would have on the trader’s business.”

our client mistakenly applied to VAT register with effect from 1 May 2018. The original EDR requested was backdated from the compulsory EDR, and there was a genuine misunderstanding. We do not have details of the first VAT return due date, but as HMRC advise they should not work on a mechanistic basis, it is reasonable to expect that HMRC will be prepared to revise the EDR for your client in this case.

This case does not concern a request to amend the EDR to an earlier date than that originally requested, which is most often concerned with a realisation that pre-registration input tax will be out of time to be claimed. As detailed in VATREG25400 the eligibility criteria considered by HMRC for requests to backdate the EDR are more stringent, and far less forgiving in relation to VAT registration applications submitted on the businesses’ behalf by an accountant or other professional representatives.

We recommend that agents submitting VAT 1 applications on behalf of their clients take care to establish both the compulsory date of registration and the impact of that date on potential pre-registration input tax claims. How will additional output tax due following application for an earlier (voluntary) EDR compare to additional input tax recoverable?

In particular, where there is an anticipation that the value of taxable supplies may increase so rapidly as to potentially exceed the threshold on the forward look, an earlier voluntary registration date needs to be considered before the forward look registration become a reality and prevents a backdated EDR.