Received a letter from HMRC about VAT registration? Here’s what it means

HMRC has recently been sending letters to businesses it believes may have exceeded the VAT registration threshold. If you’ve received one of these, the key thing to know is, this is not unusual and it doesn’t always mean HMRC is right – but you will still need to act.

We’ve summarised a few of the commonly asked questions we get from clients below, as well as a few pointers as to what you can do next.

Why have I received this letter?

HMRC uses information from your tax returns and other data sources to identify businesses that may have crossed the VAT threshold. They may have seen turnover reported on your Corporation Tax return that suggests your business may have gone over the limit, so it is wise to review your position and take action if needed.

What is the VAT registration threshold?

You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period.

A common misunderstanding is that this applies to your accounting year, but it doesn’t. It’s based on a rolling period, meaning you need to look at turnover month by month.

What does “Taxable Turnover” mean?

Taxable turnover includes:

• Standard-rated sales
• Reduced-rated sales
• Zero-rated sales

It does not include:

• VAT-exempt income (e.g. certain financial or property income)
• Income outside the scope of VAT

This distinction is important, as HMRC’s figures don’t always perfectly reflect this split.

What should I do now?

You should review your turnover as quickly as possible, looking at your last 12 months of income on a rolling basis, not just your year-end accounts.

If your taxable turnover exceeded £90,000, you’ll need to determine the exact date this happened. You’ll then need to take action – if you exceeded the threshold you’ll need to register for VAT, but if you didn’t, be prepared to justify your position – i.e. HMRC has included non-VATable income in its predictions.

What happens if I need to register?

If registration is required you’ll need to register online with HMRC. Your registration may need to be backdated and if so, you may owe VAT on sales made since that date. This is often the part that catches businesses off guard, especially if VAT wasn’t charged to customers at the time.

Will I have to pay penalties?

Potentially, yes.HMRC may charge penalties, in some cases up to 100% of the VAT owed, and / or interest on late payments – so it is really important you act as quickly as possible. Also, it’s worth noting that penalties can often be reduced significantly if you act quickly and cooperate.

What if I don’t think I need to register?

If you believe HMRC is incorrect, you shouldn’t ignore the letter. Instead, you should review your figures thoroughly and document why you’re below the threshold or outside the rules, so that you’re prepared in case HMRC follows up.

If you ignore the letter, things can quickly escalate and HMRC may register you for VAT automatically, or apply higher charges and penalties.

What if most of my income is zero rated?

Zero rated income can come from certain goods (food, children’s clothes, books etc) or from some services where your customer is outside the UK. These are still “taxable” for VAT registration purposes. However, as no actual VAT is due on these sales HMRC do not usually require registration. In this instance you need to contact HMRC and explain that all / most of your income is zero rated.

How Monahans can help

These letters are increasingly common and we regularly help clients deal with them.

We can help you review your turnover and confirm whether registration is required as well as handle the VAT registration process and communicate with HMRC on your behalf. We have also successfully helped minimise penalties for clients in the past, so it is manageable with the right approach.

If you would like any further information, contact Monahans to see how we can help.

Adam Lloyd