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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 business or sole trader that makes taxable supplies valued above the VAT registration threshold (currently £85,000) will be liable to register for VAT and charge output VAT on these supplies 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.

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, which 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, when the submission actually took place in early 2014. As FDS could not have predicted at this 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.

The lesson for businesses

This outcome underlines the importance of properly researching and complying with the rules around VAT registration exemptions and exceptions, and 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.

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