How to know when you need to VAT register
It depends on the following factors:
- Your business location
- Where your goods are shipped from
- Where your customers are located
- Your level of revenue
- In some cases, the interpretation of HMRC’s source material on VAT registration requirements (more on this below)
This means the answer is clear in some cases, and unclear in others. We will first describe the cases where the requirement to register is clear, and then we will cover the main scenario where there is ambiguity, why that is the case, and what you can do about it.
When you definitely need to VAT register
In any of the below cases, there is no debate about if a requirement to register exists. If any of these apply to you, skip to the how to register section.
You are a non-UK business storing goods in the UK or selling to UK customers
If your business has a warehouse in the UK where goods are stored, or you ship goods to UK customers, then you need to register. There is no threshold level of sales before this requirement comes into force for a non-UK business.
The date of registration is the earliest date that you shipped goods to a UK customer or stored goods in the UK.
You are a UK business with sales over £85,000
There is a VAT registration threshold of £85,000 of taxable supplies. A taxable supply is a sale where the goods were shipped from the UK (including if you are a dropshipper using UK suppliers) or if the goods were shipped to a UK customer from anywhere in the world.
If you breach this threshold in the last 12 months then you need to select a registration date which is the first of the following month. Alternatively, if you expect to sell more than the threshold in the next 30 days, then you must register for VAT straight away.
An unclear VAT registration scenario – dropshipping to the UK
HMRC’s source material on when VAT registration is required is conflicting in some places and does not explicitly cover all scenarios.
The most common point of confusion is how the rules apply to UK businesses who sell to UK customers where the goods are stored or dropshipped from outside the UK.
You are a UK business with sales less than £85,000
If your goods are always stored in the UK or you dropship exclusively using suppliers who ship from the UK, then we do not need to consider the rules on goods shipped from outside the UK and there is no VAT requirement.
If the above is not the case, for example, if you dropship to UK customers from China, then things get more complicated.
The value of your shipments to the UK is always over £135
In this case, you do not have to register. Import VAT will still need to be paid, but this is not handled on a VAT return. Instead, you will have a choice of whether to handle it yourself or leave the responsibility with your customer.
If you choose to handle the paying of import VAT yourself, this will be handled with your shipping provider and is known as shipping DDP or Delivery Duty Paid, and saves your customer from having to deal with customs directly and having to pay any import VAT or duties themselves.
You have shipments to the UK sometimes valued at £135 or less
The new VAT rules brought in 1 January 2021, mean that shipments to the UK valued at £135 or less are now liable to domestic VAT, where previously the VAT would have been captured as import VAT (paying import VAT alone does not require you to be registered). Here is where the ambiguity arises.
Why you might have to register
HMRC’s own guidance on VAT and overseas goods sounds close to explicit that all sellers who ship goods valued £135 or less from overseas to non-business customers in the UK must register.
Consignments valued at £135 or less […] The seller must charge and account for VAT at the point of sale.
To charge and account for VAT the seller will need to […] register for VAT — sellers that are already registered for VAT do not need to re-register.
This may seem clear, but there are compelling reasons to believe that the £85,000 threshold for UK businesses still applies.
Why you may not have to register
There are three main pointers to there not being a requirement for UK business in the above circumstance.
- HMRC’s VAT Registration page describes reasons you must register, and the UK dropshipping scenario above is not explicitly mentioned
- HMRC’s VAT application form asks you to select the reason for your compulsory registration from a pre-set list, and offered options do not capture the above scenario
- In various other parts of HMRC’s guidance and VAT manuals, the wording implies that a threshold applies in the sale of overseas goods scenario described above
Can you just ask HMRC to clarify?
We have written to HMRC on various occasions, and so has the broader ecommerce community. The responses received are the same lines from the sources referenced already which are open to interpretation. This is often the case if no case law precedent has been established.
Essentially, the treatment will remain uncertain and the outcomes of VAT investigations on this point will vary until a case reaches a high court. Until then, we are unlikely to receive clarification beyond what is available in written sources.
What should you do if the requirement is uncertain?
When this happens, you will need to make a decision based on the benefits and risks to your business. Here is a summary of the pros and cons for your business of registering if are facing this decision. We are talking strictly about a UK business with less than £85k revenue here.
Pros of registering
- No risk of fines or penalties
- No risk of an unexpected VAT bill
- You may save stress and no contingency planning required for a VAT investigation or the potential costs above
- If you would claim back more VAT than you pay, e.g. you sell zero-rated goods, then VAT registering early is a benefit
Cons of registering
- You may pay more VAT than is required
- You may face some difficulty in successfully registering for VAT because the application form is unclear in this scenario
What is our opinion?
Our opinion is that HMRC intends for the £85,000 VAT threshold to apply for UK businesses. As an accountancy, we are happy to support clients who choose to interpret the rules as not creating a registration requirement.
However, the reality is that in the case of you facing a VAT investigation, you will get a different interpretation and outcome entirely dependent on the opinion of the case officer that HMRC assigns to you. Likely, most officers will agree with the above interpretation, but some will form a conclusion by looking at the guidance at face value only.
In conclusion, there is a real risk of HMRC challenging a decision not to register, and you needing to pay VAT on your sales from the very beginning of selling goods into the UK. It will depend on your own risk tolerance, whether you decide to not register, and if so, how much cash you set aside and for how long, to cover this potential risk.
You have temporarily gone over the VAT threshold
There are a few cases where it may make sense to apply to HMRC for an exemption from the requirement to VAT register.
If you are a UK business and have gone over the 12 month £85k threshold, and you have good reason to believe that this is temporary, then this may apply. Similarly, if you are an overseas business and have made one or two sales to the UK and do not intent to continue, then you may also use this process.
If your exemption is denied, you will have to register, complete a VAT return for the period in question, and then de-register. This is usually preferable to facing an unexpected VAT bill and fines or penalties from HMRC.
How to register for UK VAT
You or your tax agent can register your business by post and online. The questions in both approaches are similar, with the main difference being that online applications are processed on average 10 days faster.
For a UK business with a UK director representing the business for the application, we would recommend applying online. In any other scenario, we would recommend applying by post. The reasons for this difference in treatment and tips on how to successfully apply are covered in our post on How to for register UK VAT.
If you would like us to be your agent and register you on your behalf, don’t hesitate to get in touch.