Possible VAT Threshold Crossing (Chicken-Egg Scenario)

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  • #55766

    Hi all,

    I was hoping for some advice with regard to when would be the best time to register for VAT. Here is our current situation:

    • We are a small UK limited company selling software as a service (online subscriptions, digital goods) 
    • We currently do approx ~£250k in annual turnover, however only £15-20k of that is related to sales within the UK specifically (sale of digital goods are taxed in the buyer’s region)
    • Therefore, we are not currently registered for VAT as we are significantly below £85k threshold
    • We have suddenly had a possible large contract come through the pipeline that is worth around £120k which will immediately push us over the UK VAT threshold
    • Things are moving quickly and it’s difficult to know with any certainty if we will land the contract
    • If it moves ahead, realistically we anticipate the revenue to come through sometime in late Dec / early Jan
    • We do not envisage crossing the UK threshold over the next 12 months if this contract does not go through

    Given our situation, I was hoping for some advice with the following questions:

    1. Can we wait to register for VAT until after the revenue for this contract comes through? (even though we are technically aware of it ahead of time?)
      1. If yes; can anyone confirm if the revenue from the new contract would be subject to VAT given that we were not registered at the time?
      2. If no; how best do we handle this chicken-and-egg scenario? We don’t have a VAT number, so we can’t invoice with added VAT. Equally, if we do register and get a VAT number, the contract may fall through and then we end up causing ourselves a lot of headaches with unnecessarily accounting for VAT in our UK sales.
    2. I am aware we could apply for a temporary exemption, but we are worried that this application may take a long time to be reviewed and could be denied by HMRC because the contract value is significantly over the £85k threshold. Also, we are worried that eyebrows may be raised if we happen to get a subsequent large contract through again in the future (no guarantees at this point). Is this a valid concern or are we stressing over nothing? 

    Outside of the above, can anyone tell me if we are missing something blindingly obvious that we haven’t considered?

    Ideally, we would like to not invoice for VAT now and only register for VAT after the revenue for the contract definitely comes through. However, we’re worried that we may be held liable for VAT on this contract which, on a contract value of £120k, is not an insignificant amount…

    Many thanks in advance for any help! ?

    Trevor S

    The law on registration under what is known as the”forward look” says:
    “a person becomes liable to be registered if, at any time, there are reasonable grounds for believing that the value of his taxable supplies in the period of 30 days then beginning will exceed the registration threshold.”
    At this moment you don’t know whether you will get this work or not, so cannot be required to register due to it.

    But – if you are successful, there will be a point in time at which you have been awarded the contract, but have not yet supplied the service. Assuming that the £120k has a single “tax point” (more on this later…) at that point you will know that you will exceed the threshold, and so be required to register then. The full £120k would then be liable to VAT.

    Neither exception nor exemption would apply.  These are technically different terms.  Exception can only apply to registrations required on the “backward look” (last 12 months’ turnover), and is generally where the supplier would be entitled to deregister immediately. Exemption is where your taxable turnover exceed the threshold due to zero rated supplies.

    There’s the practical aspect about how you deal with your supplier. Are they a business that would be entitled to reclaim any VAT charged on their VAT returns? If so, explain to them that the contract would require you to VAT register. You could agree to bill them for £144k, and then issue a receipted VAT invoice (which would allow them to recover the VAT) as soon as your registration number came through.

    Another possibility regarding tax point. You mention that you’re supplying software as a service. Would this £120k cover use of the software over a period of time? If so, consider invoicing periods. The tax point of a “continuous supply of services” is generally the date of each invoice (see HMRC notice 700 paragraph 14.3). So if it’s use of the software for a year, could you agree in the contract to (say) invoice £30k per quarter? You’re then not required to register under the “forward look”, as you’ll only be getting £30k plus your other taxable turnover in the next 30 days. You will only need to register under the “backward look” once the previous 12 months’ taxable turnover exceeds the £85k. Based on your figures, you might not reach that point until the third quarter, by which stage there will only be one quarter left liable to VAT.


    Hi @Trevor S,

    Many thanks for such a helpful response, that makes a lot of sense! I really appreciate you taking the time to reply in such detail. 

    Thanks! ?

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