A person or a business, that has not registered for VAT (value-added tax) can still be paid, but there’s an extra step to take – adding the VAT rate yourself. This is 20% as a standard and is necessary for all goods and services purchased from a non-VAT registered company in the UK. That being said, you can reclaim the amount from HM Revenue and Customers (HMRC).
But what are the steps and processes to take to identify non VAT-registered business, to pay the tax, and to reclaim the tax? In this article, we outline these steps to ensure easy navigation.
What are the steps to paying someone who is not VAT-registered?
Here are the key steps for properly paying someone who is not VAT-registered:
- Determine VAT Status – Firstly, it’s important to make sure the person or business you’re paying is truly a non-vat registered business. Neglecting to charge VAT to a VAT registered business is grounds to be fined. Ask the supplier directly if they are VAT registered or simply request an invoice showing VAT. When you get the number via VAT Invoice, you must check it via the HMRC VAT Number Checker.
- Neglect VAT – Once you confirm that the payee is a non-VAT-registered business, then you needn’t add the charge to the bill.
What changes are to be made to the sales invoice?
The sales invoice is a legal document issued to customers after supplying goods or services, and in the event of paying someone who is not VAT-registered, it must have the following:
- Unique invoice number
- Business name and address
- Invoice date
- Customer’s name and address
- Description of goods/services
- Amount charged
- No VAT should be listed or charged
How To Charge VAT
Learn how to charge VAT on the sale of all taxable goods and services you provide. Registered businesses can calculate their tax by taking 20% of the prices of goods sold to the customer and applying it to the bill. VAT should be broken down automatically as a result. Keep a record of all VAT charges.
What Does Being VAT Registered Mean?
VAT stands for “Value Added Tax”, and it is a tax levied on certain goods and services throughout the UK. This money goes to the government for collection, providing it a significant source of revenue. A business with a taxable turnover of £90,000 must be registered as of the 2024-25 tax year and must become a VAT-registered business, and you must charge VAT at a 20% standard. Some products have exceptions, however, usually so that the government can incentivise the purchase.
A business without VAT is a business that isn’t earning enough, though the upside is that customers will not need to pay VAT, thereby making your goods and services cheaper. That being said, businesses can register voluntarily for VAT even if they don’t reach the cap.
Who Needs To Register?
The following are the conditions in which you must register for VAT mandatorily or face consequences via the HMRC:
- VAT Threshold – A business with a taxable turnover or receiving goods that exceed £90,000 in worth (in the tax year of 2024/2025) must register for VAT – no exceptions. If you expect your turnover to reach this point in the next 30 days, you are required to register.
- Special Service Provision – There are some services for which the UK requires you to register for VAT regardless of your threshold. This is usually for international services, such as digital services to non-business customers in the EU. The list of specific services is fairly exhaustive, so for more information visit the website linked.
Voluntary VAT registration is also available for businesses below the £90,000 per annum threshold. Registering voluntarily means evading possible fines. Paying VAT makes such businesses eligible to reclaim taxes they made on purchases. Consult an accountant or tax lawyer if unsure about the benefits of voluntarily registering for VAT. They can guide you on the best practices to stay compliant and make the best decision for your business.
What Are The Benefits Of Being VAT Registered?
There are several benefits to being VAT-registered:
- Claim VAT back – VAT returns are a huge boon for organisations with high business expenditures.
- Business image – Companies you work with see VAT registration as a mark of credibility. Customers also prefer working with businesses with a valid VAT registration number, as was proven in GOV.UK’s study named “Behaviours and experiences about VAT registration“.
- Avoiding fines – Once you hit the VAT registration threshold, which is £90,000 turnover, you will need to be VAT registered within 30 days after the end of the month.
- Flat rate scheme – Eligible small businesses pay a set percentage of turnover at VAT rather than calculating VAT on all transactions, allowing you to keep the difference when costs are low.
- International trading advantage – VAT-registered businesses benefit from streamlined dealings with customs and EU trade under the reverse charge mechanism.
This finding is so well known that it’s one of the many reasons that a business may voluntarily register for VAT, aside from the fact that you must be VAT registered to reclaim the VAT you’d otherwise spend.
How To Register For VAT
VAT registration is an easy process. Accurate VAT details must be provided during the registration process to avoid errors. Go online to the HMRC website and fill out the form requesting your details, ensuring you provide accurate VAT details. Details include the business name, address and contact information. You also need to submit your bank details to set up a link for direct debit payment.
The deadline for VAT registration is the 20th of the month when you exceed the £90,000 per annum turnover.
The Three VAT Registration Schemes
There are three VAT schemes available during registration:
- Annual accounting scheme – The simplest of the schemes. It requires only two payments to HMRC each year, the first payment deadline being due at the end of the VAT quarter and the second at the end of the financial year. Businesses with low turnover are drawn to this as it helps reduce their cash flow.
- Cash accounting scheme – The next scheme is the cash accounting scheme, similar to the last scheme, only the payment is more regular. It requires you to pay VAT on each payment received after a customer purchases, a helpful strategy for industries where payment is not always immediate.
- Flat rate scheme – The flat rate scheme is a unique VAT payment method, charging a flat VAT fee on the sale of all goods and services within your business. The advantage is that bookkeeping becomes easier since all VAT calculations are similar. But there is a catch – you may end up paying more VAT in the long run than other schemes due to constant payments.
How To Pay VAT
You pay tax depending on the VAT scheme.
You can choose to complete the VAT payments either online or through post, with HMRC providing simple methods for companies to set up direct debit systems. It is a safe approach since the money is deducted automatically on the due date from the business bank account to HMRC, avoiding any accounting errors. The criteria is to always leave enough money to cover the payment and there will be no worries about VAT deadlines.
HMRC reserves the right to charge you interest or fines for late payments, with penalties being up to 100% of the tax owed. This discourages businesses from paying their taxes after deadlines, as well as ensuring their VAT details (or those of other companies) are correct.
Businesses can face a minimum penalty for late or incorrect VAT payments. It is always recommended to contact HMRC if you think there might be issues with VAT payments.
HMRC Penalties For Different VAT Errors
VAT-related fines or penalties are different depending on the specific error.
- Late Filings – The late filing of tax returns could result in a £100 fine or more.
- Incorrect Reporting – Incorrect reporting of VAT charges can lead to significant penalties.
- Failure to pay – Failure to pay stipulated fines would result in more severe penalties.
- Fraud/Tax Evasion – More serious compliance issues with HMRC are those related to fraud or tax evasion. These are criminal charges with possible prison sentences for guilty individuals or businesses.
Who Can Advise You On VAT
As VAT-registered businesses grow, it be can become more of a full time duty. In these situations, we recommend having a specialist. If tax laws confuse you, understand that having a specialist is one of the best things you can do, as they are constantly changing with the times.
There are three main types of professionals to consider for VAT-related issues:
- Accountants – Talk to an accountant if you have problems with understanding the VAT regulations, who can be contracted to take care of all VAT payments on your behalf. Note that mistakes with VAT returns attract fines, and having a professional to take over for you provides you with great protection.
- Tax Lawyer – A tax lawyer is just like any other lawyer – they can represent you in legal situations. For example, if you are charged to court for VAT fraud or evasion.
- HMRC – Contact HMRC themselves for information and guidance on tax regulations you do not understand. HMRC is available through phone, post or online channels.
Conclusion
Paying a non-VAT registered company requires some extra steps, but they are vital to follow. You can avoid this problem by working only with companies you have researched beforehand, but you must follow the steps outlined. By calculating and paying the 20% VAT yourself, then reclaiming it if you are VAT-registered, you can stay compliant while working with suppliers of all sizes whilst not losing out monetarily.
Regardless, understand that HMRC relies on VAT to generate revenue, and they protect their right to the levy fiercely.
