When the sales turnover of a business reaches the vat threshold, currently 64,000 pounds per annum until reviewed in April 2008, then registration for vat is compulsory. If financially beneficial, businesses can register for vat prior to sales turnover reaching the vat threshold.

When a business registers for vat it becomes responsible for charging vat at the correct percentage on every sales invoice and transfer of goods and services and also maintaining accurate financial accounting records of the vat charged hat are subject to vat inspections. If the sales turnover has breached the vat threshold that business is liable for the vat on sales even if it has not charged the customer.

The vat charged to customers is called output tax and the vat on purchases is called input tax. When a business has registered for vat in addition to maintaining records of sales and input tax it must also keep accurate financial records of purchases and input tax in order to calculate the vat payment to be made. The amount of vat to be paid each quarter is the difference between the sales output tax and the purchases input tax and is paid quarterly to HMRC.

Specific types of business transactions are exempt from vat such as insurance and loans. If the business only supplies exempt items then the business cannot register for vat to reclaim the input tax paid on purchases.

Registering voluntarily for vat when the sales turnover is below the vat threshold is a financial planning decision that each small business should consider. There are both advantages and disadvantages to a voluntary registration and the timing of the registration may also be a feature to be taken into account.

The advantages include being able to reclaim the vat input on purchases which is otherwise lost as a financial cost to the business. However as a consequence of a voluntary vat registration that business would also have to charge vat on all its sales invoices.

If the majority of customers are already vat registered themselves then registering does not normally affect sales volume and can increase the credibility of the business. Charging vat to non vat registered clients such as members of the public would increase the amount being charged and make the small business less competitive.

When a business moves from being non vat registered to being vat registered changes may have to be made to the bookkeeping records being maintained. Not normally a problem if accounting or bookkeeping software is being used provided the financial system employed can fulfil the enhanced requirements being vat registered.

The accounting requirements of being vat registered require the business to issue vat invoices which show the name and address of the business, the vat registration number, sales invoice date and the vat being charged. A bookkeeping record of sales invoices issued should be maintained with an audit trail, list, to enable the customs and excise to verify the vat records.

In relation to purchase invoices and reclaiming the vat input tax vat may only be reclaimed on those invoices for which the business has a vat purchase invoice. A correct vat input invoice must contain the vat registration number of the supplier who issued the invoice. A bookkeeping record is required of all purchase invoices from suppliers clearly showing the output tax being reclaimed.

Vat returns are normally required to be prepared on a quarterly basis and submitting to customs and excise before the end of the following month. If registered for the online service vat returns can be filed online. There are benefits to filing the tax return online in that many businesses may receive up to 7 days longer than normal to file the vat return if the vat payment is being made electronically.

Penalties and interest may be imposed for submitting vat returns late and making late payments. When a vat return is not submitted on time an assessment may be raised which has to be paid as a legal debt until such time as the return is submitted and the amount due corrected.

It is important to submit the vat return on time even if there is a problem paying the full amount. Failing to submit on time brings the business to the attention of the tax authority that is more likely to inspect and investigate persistent offenders. A business can be expected to receive an inspection every three years however in the worst case scenario of a delinquent vat registered business the customs and excise could inspect every quarter.