Contributed by Neil Warren CTA (Fellow)
Last month was unique for my VAT consultancy practice. For the first time in 28 years, the bulk of my fees were earned – pause for dramatic effect – from advising clients who are not actually registered for VAT. How can this happen, you might ask?
In this article, I will share three scenarios, giving a clear message that you are never completely safe in the shark infested waters of the nation’s favourite tax.
Situation 1: Buying services from abroad: should you register for VAT?
Imagine you trade as a business that only has exempt sales – supplies of goods or services that fall within VATA 1994, Sch. 9 – and are not registered for VAT. Under what circumstances should you be registered? An example will help.
Example – Weglin Insurance Ltd
- When a UK business buys services from abroad, and the services are taxable under UK legislation, it must treat the payments to the overseas supplier as its own taxable turnover as far as the compulsory registration threshold is concerned.
- The annual purchases of £150,000 exceed the compulsory registration threshold, so Weglin should have registered at some point in 2013, possibly 2014. A late registration must be corrected up to 20 years ago.
- When Weglin is registered, it will apply the reverse charge on its purchases from abroad, accounting for annual output tax of £30,000, but with no input tax claim in Box 4 because of partial exemption. Its total liability over, say, 12 years, is £360,000, with a potential late registration penalty of at least 10% of the tax owed, i.e. £36,000.
Situation 2: Are your sales still exempt?
- Cosmetic or medical treatment – the issue of whether certain treatments are exempt from VAT as a medical service intended to improve the health of a patient, or a standard rated cosmetic procedure which has been carried out for vanity/appearance purposes, has become as confusing as the Spurs team tactics in this season’s Premier League. There has been some conflicting case law and the medical industry’s view that many cosmetic procedures improve the mental health of a patient and are therefore exempt from VAT has been widely challenged by HMRC.
- Click-through sales on the Internet – VAT anoraks like myself will be aware that HMRC have decided to appeal their defeat in the First-tier Tribunal case of Performance Leads Ltd [2025] TC 09543 . Urgh! More uncertainty – what a pain! Basically, the judge had to decide if the online company was providing taxable advertising and information services or exempt financial intermediary services. The company won its argument because the judge concluded that it was doing more than just pass on raw data because it used a meaningful filtering process to match potential customers with specific financial service providers.
Situation 3: Is your exception or exemption from registration still valid?
- Exception – a business has temporarily exceeded the compulsory threshold due to, say, a one-off sale that won’t be repeated, and taxable sales in the 12 months thereafter will be less than the annual deregistration limit, which is currently £88,000. HMRC can grant an exception to registering in this situation.
- Exemption – most or all business sales are zero-rated and therefore VAT returns would be net repayments. HMRC are happy to grant an exemption from registering if they will not collect any tax. But what if circumstances change?
Example – Weglin Cafe Ltd
The company was granted an exemption from registration in 2017 because most sales were cold take-away sandwiches, i.e. zero-rated. In 2021, it was granted planning permission for a building extension and 60% of its food and drink sales are now served on the premises, i.e. standard rated.
- HMRC’s exemption letter from 2017 is no longer valid because the majority of sales are now standard rated, so repayment returns are unlikely to be submitted in the future.
- The company has a late registration problem going back to 2021.
Note – HMRC guidance about ‘exceptions’ is given in VAT Notice 700/1, para. 3.7; advice about ‘exemptions’ is given in para. 3.11 . The key sentence about exemptions is as follows: ‘You must tell us at any time if your circumstances, including the nature of the supplies you make, change’.
Final score
To put you out of your suspense, there was a happy ending in only one of my three situations. The services purchased from abroad created a late registration problem that could not be averted; the past exemption from registration granted by HMRC was no longer valid because the nature of trading had changed. In footballing terms, that’s HMRC 2 : Taxpayers 1. The first business was 12 years late registering and the other was five years late.
Is now a good time for advisers to review the VAT status of unregistered clients? Definitely!
Useful links
For commentary on VAT registration, see Indirect Tax In-Depth from ¶43-000.
If you have any comments on this article, please e-mail the editorial team at tax-weekly@croneri.co.uk.
Document downloaded on 24-04-2026 from Croner Navigate, the UK’s leading online research service for tax, audit and accounting professionals. Find out more at www.croneri.co.uk or call 0800 231 5199.
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