Article by Stanley Dencher, Senior Technical Editor, Croner.CCH Group Ltd, published in the June 2001 issue of Tax Adviser. A person can be liable to notify Customs of his liability to register for several reasons.
Taxable supplies in the UK
Generally, a person (not a ‘business’) must notify Customs of his liability to be VAT-registered if:
(1) he is unregistered;
(2) he makes taxable supplies, which are supplies made in the UK in the course or furtherance of any business other than:
(a) exempt supplies; or
(b) supplies which are outside the scope of VAT; and
(3) those taxable supplies exceed any of these three limits:
(a) £54,000 at the end of any calendar month in respect of the one year or shorter period then ended (the past turnover rule; VATA 1994, Sch. 1, para. 1, as amended from 1 April 2001);
(b) at any time, if there are reasonable grounds for believing that the value of his taxable supplies in the 30 days then beginning will exceed £54,000 (the future prospects rule;); or
(c) where a business carried on by a taxable person is transferred to another person as a going concern, if:
(i) the value of the transferor’s taxable supplies in the year ending at the time of the transfer exceeded £54,000; or
(ii) there are reasonable grounds for believing that the value of the transferee’s taxable supplies in the 30 days from the time of the transfer will exceed £54,000.
Relevant supplies
Both zero and positive-rated supplies in the UK are taxable supplies for the purpose of the registration limits. However, generally the following supplies are disregarded when calculating the turnover for the purposes of the registration limits:
(1) any supplies when the person was previously registered; and
(2) certain supplies of capital assets other than land and buildings.
In Bruce No. 12,484, the trader’s business began on 11 April 1990. In November 1990 he sent to Customs Form VAT 1 because he realised that his supplies in the business’ first year would break the registration threshold. He was unfamiliar with the form and completed both the section on compulsory and on other types of registration. The form declared that his first supply had been made on 11 April 1990. Customs registered him with effect from that date. He unsuccessfully appealed claiming that the registration should apply from November 1990.
Deferred registration can help
With appropriate timing, a surprisingly high value of taxable supplies can be sheltered by a new trader, being a person who did not acquire a going concern. This is vital if the supplies are to the general public. Some traders should work at under full capacity to keep the supplies at the appropriate level.
Example 1
A trader started his business from scratch in April 2001 and made taxable supplies to the general public of £50,000 in April, £51,000 in May and £52,000 in June.
The supplies did not exceed the past turnover limit until 31 May 2001 (£101,000 exceeds £54,000). Assuming that the future prospects rule did not bite, registration is only effective from 1 July 2001 (i.e. a month from 31 May). The output tax saving is £22,787 being 7/47 x £153,000. Customs should receive Form VAT 1 by 30 June 2001, although in practice a penalty is rarely assessed if Customs receive the form by 31 August 2001 being three months from the end of the period in which the past turnover limit was breached.
Accelerated registration can help
In Pontnacraig Inn and Restaurant No. 11,528, the trader unsuccessfully claimed VAT on refurbishing the inn. The VAT was on a composite supply of services with a tax point more than the permitted six months before registration. Other things being equal, the innkeeper would have been better off if registration had been earlier and within the six-month limit.
Penalty for late registration
A penalty may be due if a person fails within the time-limit to notify Customs of his liability to register. The penalty is subject to a minimum of £50 and:
(1) 15 per cent of the net VAT due where the notification was over 18 months late;
(2) ten per cent of the net VAT due where the notification was over nine months late, but not more than 18 months late; or
(3) five per cent of the net VAT due where the notification was no more than nine months late (VATA 1994, s. 67).
De-registration and UK supplies
Example 2
Andy was liable to VAT register from 1 June 1999. However, he only notified Customs by voluntarily submitting Form VAT 1 on 1 August 2000, i.e. he was over nine months late, but not more than 18 months late and is liable at ten per cent. The net VAT due for the period from the effective date of registration to 1 August 2000 was £4,000 (£7,210 output tax minus £3,210 input tax). Assuming there is neither mitigation of the penalty nor a reasonable excuse, the penalty is £400 (ten per cent of £4,000 and over £50).
If a registered person stops making taxable supplies in the UK, he must notify Customs within 30 days from when his business terminated. Customs should cancel his registration.
Alternatively, if a registered person satisfies Customs that the level of his taxable supplies in the next year will be under £52,000 (from 1 April 2001), Customs should cancel the registration on the day on which he requests such cancellation or such later day as may be agreed, unless the level of supplies is within that threshold merely because supplies are suspended.
Although the test relies on future supplies, changes in circumstances and trends shown by past supplies are generally relevant. In Lloyd No. 15,786, a tribunal held that its role was supervisory. Thus, to overturn Customs’ decision to refuse deregistration, the appellant needs to show that Customs had been unreasonable. All material facts should be provided to Customs. In Darker t/a Fig Tree Coffee Shop No. 16,620, the tribunal held that Customs had acted reasonably in refusing to de-register a recently registered shopkeeper who had failed to submit any VAT return.
A person, who failed to register promptly, must account for the output tax which he should have charged on his positive-rated supplies. Such liability is strictly unaffected if his taxable supplies were later under the de-registration limit. Generally, Customs refuse to deregister the person from when his supplies were under the limit and he lacks the right to appeal against Customs’ refusal. The statutory right of appeal is against a decision by Customs to refuse de-registration and no such refusal can arise if the person was not registered in the first place.
Example 3
Pedro is an estate agent in Banbury. On 1 September 2001, he loses the contract to be the sole selling agent for the builder of an estate of about 1,500 houses and is unlikely to replace such an important contract. He predicts that the level of his taxable supplies in the year from 1 September 2001 will be about £20,000, i.e. under the relevant de-registration threshold. He stops being liable to be VAT registered from 1 June 2001.
Liability re goods-on-hand at de-registration
On de-registering, certain goods are generally treated as supplied and output tax is due unless the VAT on the supply is no more than £1,000; or the business is transferred as a going concern to another taxable person.
Persons de-registering with goods worth no more than £5,714 avoid paying VAT on de-registering (17.5% of £5,714 comes to just under the £1,000 limit). If possible, goods should disposed of before de-registration so those still on hand are within the monetary limit.
Example 4
Sammy ran a removal business and was VATregistered. He de-registered in June 2001. The goods-on-hand included a typewriter, a removal van and lifting equipment. He had reclaimed VAT on such items, which on de-registering were worth £8,000, which exceeds the £5,714 limit. He accounts for output tax of £1,191 (the VAT fraction 7/47 multiplied by £8,000).
Distance selling to the UK
A distance seller supplies goods and delivers them to an unregistered person in another member state. Generally, such a supplier must register in the UK on any day if (VATA 1994, Sch. 2):
(1) he is unregistered; and
(2) his relevant distance supplies to the UK exceed £70,000 in the period from 1 January of the year in which that day falls.
Relevant distance supplies excludes, for example, goods which are subject to excise duty such as alcoholic drinks.
Cross-border shoppers
Generally, a person is liable to be VAT-registered at the end of any month if (VATA 1994, Sch. 3):
(1) he is unregistered; and
(2) he makes relevant acquisitions in the period from 1 January of the year in which that month falls in excess of £54,000 (from 1 April 2001). Alternatively, he is caught for
immediate registration if there are reasonable grounds for believing that the value of the acquisitions will exceed that limit in the next 30 days.
Overseas traders selling UK goods
Registration in the UK is due for traders who are established outside the UK and who make UK supplies of goods on which input tax has been, or will be, reclaimed (VATA 1994, Sch. 3A). The relevant reclaim provisions are:
(1) for traders established elsewhere in the Community, the eighth VAT directive which in UK law is Value Added Tax Regulations 1995 (SI 1995/2518), Pt. XX; and
(2) for traders established outside the Community, the thirteenth VAT directive which in UK law is Value Added Tax Regulations 1995, Pt. XXI. Such registration has no threshold and catches a company in, say, France which reclaims UK VAT from Customs under the eighth VAT directive on, say, a filing cabinet and sells the cabinet in the UK (a UK positive-rated supply). The French company must register in the UK and account for UK output tax on the sale of the cabinet.
Conclusion
Unregistered persons need to know the many rules on registration and promptly monitor the nature and scale of their activities so that Customs are notified in time. If the person’s tax adviser is only aware of the facts when preparing the annual accounts, this could be too late to avoid a penalty and minimise any VAT due to Customs (or maximise any VAT repayment).
The registration process may be easier by accessing the website www.hmce.gov.uk/bus/vat/registration.htm and printing off the appropriate registration form, e.g. Form VAT 1, which can be completed manually and sent to the relevant, regional VAT registration unit (VRU). This can avoid delays in obtaining the appropriate statutory form.
Technical Department
020 7235 9381
June 2001 by Stanley Dencher
