Case Study: Securing an Exception from VAT Registration: a Successful Case Study

Client profile

Our client faced a challenge after a one-off contract unexpectedly pushed her taxable turnover above the VAT registration threshold. HMRC initially refused her request for exception, but with our support, the outcome was reversed, saving her business from a financial loss.

The challenge

Our client entered into a single, large contract that involved UK VATable supplies. At the outset, both she and her customer anticipated the work would conclude within a set period and her overall turnover would not exceed the VAT registration threshold on a rolling 12-month basis.

However, the project overran by several months, taking her taxable turnover above the threshold. She applied to HMRC for an exception to registration, but this was refused on the basis that HMRC considered she could not have known at the time of entering into the contract that the threshold would not be exceeded.

Our approach

We carried out a detailed review of her supplies and identified two important factors:

• The client had contemporaneous evidence showing that both she and her customer expected the contract to end within the year, meaning there was no expectation that turnover would exceed the threshold.

A large proportion of her other income was covered by the Tour Operator’s Margin Scheme (TOMS). Under TOMS, only the profit margin is included for VAT registration purposes, and the method of calculating turnover meant part of her income was outside the scope of UK VAT and part was zero-rated. This reduced her monthly VATable turnover considerably.

The outcome

We presented HMRC with evidence, including email correspondence, confirming that the contract was expected to end by a specific date but had overrun due to unforeseen circumstances. We also demonstrated that the turnover HMRC had included for registration purposes was overstated, as income under TOMS had been treated incorrectly.

The HMRC registration unit asked us to explain the TOMS calculations in detail and to provide a breakdown for each month of the period in question. Once this was done, HMRC accepted the position. Going forward, the client’s business was largely based on overseas tours, with the VATable element subject to UK VAT at the zero rate.

What this meant for the client

For the client, the decision was a major relief. The contract that pushed her above the threshold was with a non-VAT registered customer and did not allow VAT to be added to the price. Had compulsory VAT registration been imposed, she would have been forced to deduct VAT from the agreed contract value, turning a profitable project into a loss.

By successfully challenging HMRC’s initial decision, The VAT People protected the client’s position and avoided a damaging outcome for her business.