Does a Limited Company Need to Be VAT Registered?

When does a limited company need to be VAT registered? It’s quite simple: when your annual turnover exceeds the threshold set by the local tax authority. For example, if you supply goods or services in the UK, your company is obliged to register for VAT when its taxable turnover is above £85,000 per year.

Of course, when it comes to VAT (value added tax), things are never entirely simple. For example, if you supply goods to other countries, you may need to register for VAT in one or more countries abroad. 

Even domestically, there are some complicating factors occasionally affecting your value added tax obligations. For instance there may be a different threshold in some countries depending on whether you sell goods or services. For example, in France, there is a distinct threshold for goods (€85 800) and services (€34 400).

Note also that in rare cases, there is no threshold, and all businesses must register for VAT. This is the case in Spain and Turkey.

However, the basic principle is relatively straightforward. Whether a business is a sole trader, a limited company, or a publicly listed company is less of a factor than the basic question of annual turnover. If your limited company’s taxable turnover exceeds the threshold, you need to register for VAT and submit a regular VAT return. 

When must a company register in more than one country?

There may be circumstances in which a limited company needs to register in more than one country. One scenario is in regards to the VAT registration threshold. Suppose a company supplies goods and services in a country, and the value of that supply exceeds the local VAT registration threshold. In that scenario, the company generally is required to be a VAT registered business. That may be the case regardless of whether the company has a fixed establishment in that country. 

However, there is another important consideration when selling to customers in the EU. If a business is engaged in distance selling of goods or services to customers in the EU (generally, in the form of e-commerce), you are required to register for VAT if you exceed the special distance selling threshold.

The EU’s distance selling threshold was recently amended. There is now an EU-wide threshold (rather than, as previously, a specific threshold for each Member State) of €10 000. Under the new rules, any e-commerce business that sells goods or services to customers throughout the EU with a total annual value of more than €10 000 is obliged to register for VAT. 

Given the relatively low threshold, even smaller companies need to be careful about their potential VAT liability when selling to the EU. Fortunately, EU regulators have also simplified the distance selling VAT registration process. You can now account for VAT on sales throughout the EU with a single registration using the new One Stop Shop (OSS) mechanism. 

Digital taxes for a digital economy

In our tech age, companies that supply electronic services via the internet are almost by definition global businesses. There are very few natural barriers to customers accessing online gaming platforms, virtual classrooms, or streaming services all over the world. 

In response, many tax authorities have instituted digital services VAT on foreign suppliers of electronic services. Digital services VAT has become a popular solution, and many more countries are adopting the mechanism. Any company that supplies digital services should thus ensure they fully understand their global VAT obligations. 

Complying with digital services VAT is complicated by two factors. First, thresholds vary from country to country. For example, if you supply services exceeding THB 1.8 million to customers in Thailand, you must register for VAT. Another example, in South Africa, the threshold is set at R1 million. 

Second, the precise definition of ‘digital service’ also varies. For example, online teaching may be subject to digital services VAT in one jurisdiction but not another. For this reason, expert guidance is often indispensable.  

What happens if a company is not VAT registered?

Let’s first consider the legal ramifications of not registering a limited company for VAT when legally obliged to do so.

If a company does not register for and make its VAT payments when required, it will generally face a penalty based on a percentage of the VAT owed. In addition, the company may be charged interest on outstanding VAT. These charges can be significant, severely disrupting cash flow or even leading to financial ruin.

Tax authorities may also decide to perform extended audits on noncompliant businesses. These are administratively burdensome and potentially reputationally damaging. Moreover, there is the risk that audits will detect historic non-compliance, leading to further penalties.   

In the case of repeated non-compliance, a company may even be barred from operating in a jurisdiction. Given the severity of these consequences, it is no surprise that most companies take their VAT obligations very seriously indeed. 

There may also be business consequences of not possessing a VAT number. For instance, if you sell goods on an online platform such as Amazon, they may require you to supply a valid VAT number.

When should a limited company register for VAT?

As should be clear by now, the most compelling reason to register for VAT is when you are legally obliged to. In that case, the risks of non-compliance are simply too high to ignore. Bear in mind that even accidental non-compliance is punishable. Therefore a company should take stringent care to ensure it is aware of its VAT obligations in every jurisdiction in which it does business.

However, there are also good business reasons to register for VAT, whether you are obliged to or not. 

Business credibility

Smaller businesses may wish to avoid the appearance of being fly-by-night operations. Possessing a valid VAT number can make a company seem more established. Moreover, if a business is not registered, that is evidence that its turnover is below the threshold, which may give the appearance of underperforming operations. 

Import VAT

Companies that import goods DDP need to manage their own import VAT. Registering for VAT ensures companies can recover the import VAT and potentially take advantage of import VAT deferments. 

VAT reclaim opportunities

A company will naturally incur VAT on most goods and services in the course of ordinary business operations. Registering for VAT enables the company to recover VAT on business expenses. 

Anticipating growth

A small business may wish to get ahead of the administrative burden of VAT compliance and establish the processes and systems needed to comply with VAT before they are obliged to register. This will ensure the small business does not face any unanticipated disruption when turnover exceeds the specified VAT threshold. 

Clients may demand it

Some entities will prefer to work with a VAT registered business. There are a number of reasons why this may be the case. For example, if a company supplies goods to a business in another country, it may wish to take advantage of the reverse charge mechanism. However, VAT reverse charges are only applicable between two VAT registered entities.  

Is it always a good idea to register for VAT?

While there are clear advantages to registering for VAT, even for voluntary VAT registration, the benefits do not outweigh the costs in all cases. 

Once registered, a company needs to charge VAT and submit a regular, accurate VAT return, in the appropriate format, within the prescribed deadlines. It must also keep accurate records, conforming to the local tax authority’s specifications.  

Complying with these obligations is administratively burdensome. Moreover, failure to meet the deadline for VAT payments can result in VAT surcharge rates. Fortunately, VAT compliance technology makes managing VAT much simpler and more cost-effective, especially if VAT experts support the technology. 

However, if a business is not legally compelled to register, the costs and benefits need to be carefully weighed up on a case-by-case basis.

Given the complexities of VAT compliance, all businesses should strongly consider consulting with a VAT specialist to comprehensively assess their global VAT obligations and make an informed decision about whether to register for VAT in one or more countries.