Knowing when to Register for VAT using Xero

Keeping an eye on your business turnover in relation to the VAT threshold is important for many small business owners. In this blog, we explain the how-to and benefits of knowing when to register for VAT using Xero.

Voluntary VAT Registration

So first off, it’s important to know that for some businesses, it may be beneficial to register for VAT voluntarily.  That is, do it now, don’t wait! This is normally the case when: 

1. Your customers are VAT-registered businesses, and they aren’t affected by you having to charge VAT on your Sales (as they can claim it back), and  
2. You can recover a decent amount of VAT on your business expenses 

Be sure to check with your Accountant if you think this may be the case because there are other factors to consider. 

Compulsory VAT Registration

For most businesses in the hospitality sector, particularly those that are tourism orientated, such as Hotels, Cafes, or Restaurants, most sales will be on a business-to-consumer basis (not business-to-business). In these cases, you may only want to register for VAT when you have to, because you’ve breached HMRC’s compulsory VAT registration threshold. 

When this is the case, registering for VAT at the wrong time can be costly in:

1. Unexpected VAT, and
2. HMRC penalties

It’s super important to have a solid system in place to comply with HMRC’s guidelines, and guess what? Xero Reporting totally takes the hassle out of staying compliant and keeps you on the right track! 

So what are the rules that you need to keep an eye on?

HMRC state that you must register for VAT when either: 

a) you expect your turnover to go over the VAT threshold in the next 30 days, or 

b) your total VAT taxable turnover for the last 12 months was over the VAT threshold 

The VAT threshod up to 31 March 2024 is £85,000 and it will be £90,000 from thereon.

We do strongly suggest that you check the current thresholds at the time of reading this blog, as they do change from time to time.

For HMRC’s full guidance on what to include in your VAT Taxable Turnover and to see whether the thresholds or guidelines have changed since we posted this blog, check out HMRC’s full VAT Registration guidelines here: https://www.gov.uk/register-for-vat 

Many businesses don’t realise that criteria b) refers to your rolling 12-month turnover, not just your turnover for any given tax year.   

This video will show you how never to miss criteria b) – the rolling 12-month VAT Taxable Turnover threshold. This is the most common form of compulsory VAT registration requirements, and many business owners don’t tend to understand the rolling nature of the threshold, so here’s what you need to do.

Using Xero…

After the end of each month: 

1. Update your bookkeeping

If you use Xero invoicing, your Sales will automatically be up to date, but we suggest you ensure everything is reconciled in Xero to check for mistakes and duplicates. If you don’t use Xero invoicing, you’ll need to ensure all Sales have been entered into Xero from your tills, booking system or external invoicing software. Be sure to speak to your accountant if the below apply to you: 

• You make exempt sales 
• Some of your expenses are reverse charge VAT 
• Any of the other items listed under ‘Calculate your Turnover’ apply to you

These can have an impact on when you need to register for VAT, so it’s always best to discuss them with your accountant, especially if you are nearing the VAT threshold! 

2. Run your Xero Report

1. Go to your P & L  
2. Change the date to last month 
3. Show 11 comparative periods 
4. Add a Total line to the report
5. Click ‘Update‘
6. Review your Total Sales figure  

3. Set a reminder at the start of each month to do points 1 and 2

Build this into your business admin routine, and you’ll be able to sleep easy knowing when to register for VAT using Xero!

What if I need to register for VAT?

If your Total Sales figure (assuming they are all VAT Taxable Sales) has gone over the VAT threshold, you have to register for VAT with HMRC within 30 days of the end of the month when you went over the threshold. Your effective registration date is the first day of the second month after you go over the threshold. 

To register you will need to ask your Accountant to do this for you, or if you’re registering yourself, the easiest way is to use your HMRC Government Gateway Account. 

What should I do next?

Make sure you set the VAT registration date in your calendar so that you can update your Xero Account and till or booking software to start Accounting for VAT from your effective date of registration! 

Also, check out HMRC’s guidance on how you Account for VAT while you wait for your VAT number. You may want to read our blog about understanding your VAT Return in Xero which will help you review your first VAT Return before submission. 

After reading ‘Knowing when to register for VAT using Xero’, find out…

if you are maximising the full potential of your hospitality business? Try our free Hospitality business financial health check.

This information is subject to change and is not professional advice. Refer to our disclaimer for more details.