Compulsory VAT Registration with the HMRC

A business must register for VAT with the HMRC and begin accounting for VAT from the end of the month following the month in which its taxable turnover first exceeds the annual VAT turnover threshold, or if you expect to exceed that threshold in the next 30 days.

The current VAT registration threshold is an annual taxable income of £90,000.

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Keeping proper VAT accounting records

People often view the prospect of being forced to register for VAT with trepidation. Accounting for VAT does require more discipline and organisation, but one way of looking at the problem is it involves nothing more than adapting the way you should already be keeping your books.

We will always work with clients to find the optimum way for them to comply with their obligation to keep proper VAT accounting records. It never proves to be an overly difficult task.

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Domestic Reverse VAT and CIS compliance

We often find building firms experience difficulty in correctly accounting for VAT under the domestic reverse accounting rules.

This is unfortunate, because the HMRC introduced reverse accounting to overcome the frequent failure of small building firm contractors to settle their VAT debts. The reverse accounting rules simply transfer the responsibility for accounting and settling the VAT due on an CIS-relevant engagement from the contractor to the engager, on the basis that it will prove easier to collect the tax from the engager.

The responsibility for deciding whether the reverse accounting rules apply to each of their contractor's invoices rests solely with the engager. The engager will remain liable for accounting for the reverse VAT element even if they pay the VAT to the contractor and they in turn account properly for the output VAT in their accounts.

The danger here is that construction firms rely upon engaging many contractors in the course of carrying on their business. If the engager fails to understand and apply the reverse accounting rules when they should, they are storing up an increasing VAT debt as time goes by that must be paid to the HMRC when their mistake comes to light. It always proves to be a painful and financially damaging exercise to put matters right as the amount of VAT in default frequently exceeds the £10,000 limit where the HMRC must be informed of a VAT accounting error. To add insult to injury, although the engager can retrospectively request their contractors to repay the VAT element they should not have paid, it will come as no surprise to learn recovery rates are very poor.

The moral of this story is the senior management of construction firms must take the time to understand the reverse accounting rules. They need to constantly double check they are complying with the reverse accounting rules on both their sales and purchase ledgers transactions. Failure to comply is simply too expensive to allow it happen in practice.