By Rob Stokes, head of Accounts and Audit at Optimum 

Businesses are being urged to plan ahead for VAT registration to avoid being caught out, Rob Stokes of Optimum Professional Services warns.

Government Covid grants and loans (albeit not VATable income), and going in and out of lockdown, has meant some businesses are experiencing a more erratic income. This makes it harder to plan and to predict when the VAT registration threshold of £85,000 might be reached - or even to spot when it has been exceeded.

The problem is being exacerbated by Covid and the end of the EU transition, both of which have been causing delays in HMRC's VAT registration process.

The result is that firms not applying in time are going over the VAT threshold - which is calculated on a rolling 12 months of turnover - and sometimes experiencing a delay in receiving their VAT number.

"Trading while over the VAT threshold, but without a VAT number, is problematic, because the VAT owing still has to be paid to HMRC," said Mr Stokes, head of Accounts and Audit at Optimum, which has offices is Cheltenham.

"One option is for businesses, once they have a VAT number, to issue VAT only invoices to their clients, so claiming the tax retrospectively, which is not an ideal situation to be in. This may be effective when invoicing other VAT registered businesses, which can in turn recoup the VAT in their own returns. However, consumers or non-VAT registered business are unlikely to agree to pay backdated VAT. The VAT still has to be paid, so may end up coming out of the business's profits."

Another option is to issue a gross invoice, adding a note to say VAT invoice will follow when the registration number is confirmed but, again, this brings complications.

There is also risk attached to deregistering. He said: "Businesses may consider deregistering because, at first glance, it looks like they may have dropped below the £85,000 threshold.

"A word of caution here: the VAT is repayable for any stock or assets held by the business on the date of deregistering (over a threshold of £6,000 including VAT). So for example, if you purchased a van whilst VAT registered, by deregistering you may have to pay back some of that VAT."

Becoming VAT liable also means a business needs to pay VAT via the Making Tax Digital (MTD) system for each quarter, which itself needs to be registered for, and an MTD compatible software used.

Mr Stokes added: "The solution is for businesses to prepare well in advance, by careful business planning, and predicting future sales, so that the point where it will be necessary to register for VAT can be pinpointed in advance, and an application made in good time."

To talk to Rob and Optimum Professional Services about tax planning and accountancy email rstokes@optps.co.uk, call 01242 384936 or visit https://www.optps.co.uk/.