Claiming an exception from VAT registration can be an important way of saving money for businesses who expect their turnover to dip below a certain level during a specific period.

Any sole trader or business that makes taxable supplies valued above the VAT registration threshold (currently £85,000) will be liable to register for VAT. From there, businesses must charge output VAT on these supplies if they are made after the effective date of VAT registration. However, if the value of your taxable supplies currently exceeds this amount, but is expected to dip below the VAT deregistration threshold (currently £83,000) in the next 12 months, an exception from registration can be sought.

This mechanism can be useful in helping companies with fluctuating turnover to balance the books. However, a tribunal case from 2016 demonstrates the potential consequences of failing to follow the rules correctly. As such, it is vital to understand how this process works and what your business can do to benefit.

Why VAT exemption applications must be filed in advance

The case of Facade Detailing Service (FDS) arose when the business exceeded the VAT registration threshold in the tax year 2012-13, due to a one-off contract providing services for the construction industry that was not expected to recur.

In early 2014, once this contract had come to an end, the business tried to apply for an exception from VAT registration in retrospect. The company supplied HMRC with detailed turnover figures for the two years ending March 2014 to show that the numbers were below the VAT deregistration threshold. This initial application was rejected, on the grounds that FDS could not demonstrate control over the value or duration of the relevant contract.

When FDS lodged an appeal to the First-Tier Tribunal, a similar conclusion was reached. The tribunal examined the facts as they applied in February 2013, which is when the VAT registration threshold was first exceeded; this is also when any application for a future exception should have been submitted, rather than when the submission actually took place in early 2014. As FDS could not have predicted at that earlier point when its contract would end with any certainty, the taxable turnover of the business for the coming months could also not have been accurately foreseen.

The appeal was therefore dismissed on the grounds that exceptions from VAT registration must be sought on the basis of projected turnover, and not by using facts in hindsight.

For further insights into navigating deregistering for VAT, explore our specialised service page.

The lesson for businesses

This outcome underlines the importance of properly researching and complying with the rules around VAT registration exemptions and exceptions. It is vital to give proper thought to the details of your business's application to HMRC before making it.

If you or one of your clients require advice on seeking an exception from VAT registration on the basis of taxable supplies temporarily breaching the VAT registration threshold, call our VAT helpline on 0333 3638 012. One of our expert consultants will be able to clarify your eligibility and determine the best way forward for your business

FAQs about VAT exception from registration

What does it mean to claim an exception from VAT registration?

Claiming an exception from VAT registration means that although your business turnover is expected to exceed the registration threshold, you can make a formal request to HM Revenue and Customs (HMRC) to remain unregistered. This is usually possible if you can demonstrate that your turnover will fall below the deregistration threshold in the next 12 months.

Who is eligible to claim an exception from VAT registration?

Businesses whose taxable turnover exceeds the VAT registration threshold in a given period, but is expected to fall below the deregistration threshold within a year, are eligible. These businesses must make a formal request to HMRC and provide sufficient evidence to prove their claim.

What are the common exceptions from VAT registration in the UK?

Common exceptions generally revolve around a business being able to prove that its excess in turnover is temporary and that it will fall below the deregistration threshold within the next 12 months.

How do I know if my business qualifies for an exception from VAT registration?

You will need to collect substantial evidence to demonstrate to HMRC that your turnover will fall below the deregistration threshold in the next 12 months. This can include business plans, contracts, or any other evidence that justifies your claim. An experienced VAT specialist can support you to gather this information or advise you on the types of evidence you should collect.

What is the threshold for taxable turnover that determines the need for VAT registration?

The threshold to register for VAT is a taxable turnover of £85,000 over a rolling 12-month period. The deregistration threshold is £83,000.

Can I voluntarily register for VAT even if I qualify for an exception?

Yes, voluntary registration is possible even if you qualify for an exception from mandatory VAT registration.

How do I apply for an exception from VAT registration, and what is the process?

To apply for an exception from being VAT-registered, you must contact HMRC either in writing or by completing a VAT1 form. You should include any evidence that supports your assertion that your turnover will fall below the deregistration threshold within the next 12 months, which is a prerequisite to qualify for an exception.

Is there a specific time frame during which I must apply for an exception?

You must apply for an exception within 30 days of exceeding the VAT registration threshold.

What happens if my turnover exceeds the VAT threshold after claiming an exception?

If your VAT taxable turnover remains above the threshold, you will need to register for VAT, unless you can again prove that it will fall below the deregistration threshold in the near future.

Can I temporarily claim an exception if my turnover fluctuates?

Yes, but you will need substantial evidence to prove to HMRC that the excess in turnover is only temporary.

What records and documentation do I need to maintain when claiming an exception from VAT registration?

You should keep all financial records, contracts, business plans, and any other evidence that supports your claim. HMRC may request these at any time.

How often should I review my eligibility for an exception from VAT registration?

It is advisable to review your eligibility frequently, particularly if your turnover is close to the VAT threshold. This can be done on a quarterly basis or as often as suits your business operations. The penalties for failing to do so can be severe, so it is important to stay aware of your VAT obligations.

What are the penalties for incorrectly claiming an exception or not registering for VAT when required?

Failure to register for VAT when required can result in penalties that vary depending on the degree of the offence. The penalties can be as high as 100% of the VAT due.

How does Brexit impact the VAT registration and exception rules for businesses trading with the EU?

Brexit has introduced changes in VAT treatment for businesses trading with the EU, including new customs procedures and documentation. However, the fundamental principles for claiming an exception from VAT registration remain unchanged.

Can I seek professional advice or assistance when considering an exception from VAT registration?

To ensure full VAT compliance, there is no better choice than to consult with the VAT specialists at The VAT People. We have helped countless businesses ensure that they comply with all legal requirements and procedures. Use our contact form at the side of the page or call our VAT helpline on 0333 3638 012 today.