My Client is Only Just Over the VAT Registration Threshold!

VAT Question

I have just completed my client’s income tax self-assessment for the tax year ending 5 April 2024 and have noted that the client’s turnover went over the VAT registration threshold in March 2024, when the threshold was still £85,000.

If I base his turnover on accruals (the dates of his invoices), his turnover in March 2024 was around £85500, just a few hundred pounds over the threshold, but if I use a ‘cash basis’ (the dates he has received payments), his turnover was around £87500, over the then threshold but under the increased threshold of £90000 in effect from 1 April.

It is frustrating that this happened in the month immediately prior to the increase in the registration threshold.

Can you confirm whether his turnover for VAT registration should be based on the dates of his invoice or the dates he is paid and whether the client needs to register for VAT?

VAT Answer

Prior to registration, a client cannot raise a proper tax invoice, and so an invoice does not create a tax point for the purpose of turnover and the VAT registration threshold.

Instead, tax points are created by the receipt of payment or, if early, the completion of a supply, which, for a supply of goods, is the date on which the goods are made available to the customer or, for a supply of services, is the date when all services are completed and performed.

For this reason, there isn’t really any accrual accounting for the purposes of VAT registration, and so the threshold for VAT registration should generally be calculated on the cash basis.

In regard to whether your client needs to register for VAT, the fact that in March 2024 your client’s turnover exceeded the VAT registration threshold that was in force at that time means that under the terms of the VAT law, your client was required to register for VAT; the fact that the VAT registration threshold increased the following month does not alter this requirement.

However, if your client were able to satisfactorily demonstrate to HMRC that, based on a reasonable forecast, his turnover in the following 12 months (from March 2024) would be expected to be below the deregistration threshold, then your client could request exemption from registration.

For the above, a reasonable forecast must be based upon knowledge known at the time the client exceeded the threshold (so available in March 2024) rather than any subsequently gained knowledge.

Further guidance on Exception the Registration is provided in HMRC online manual VATREG19000.

https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg19000

However, an exception from registration is a concession granted by HMRC at their discretion, and so if HMRC is not satisfied that your client’s future 12-month turnover is expected to be below the registration threshold, an exception will not be allowed, and your client will be registered with effect from 1 May 2024.

Tony Pocock
Senior VAT Advisor

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