When or if to register for VAT
When setting out in business, there are many things to think about, one of which is when or if you should register for Value-Added Tax (VAT). Not all businesses can register as it depends on whether you are making supplies which are in the scope of the tax. When your taxable turnover reaches £85k in any rolling period of 12 months, you must register. Therefore, as you grow your business, it is important to monitor your turnover to ensure that you register at the correct time. It is important to note the turnover test is not per business. If you have two businesses, you need to include the turnover of both in your calculations. Failing to register on time can be a costly mistake to make.
If your turnover is less than £85,000 you can register for VAT voluntarily. Where your customers are VAT registered and able to recover the VAT you charge, you will generally be financially better off registering but you should factor in additional administrative work involved. Your saving will be having the ability to recover VAT on your expenses. If the additional paperwork is a concern, we can file VAT returns for you. There is also a scheme called the Flat Rate Scheme which can be useful in reducing the paperwork but does affect the amount of VAT you will pay over, which could be more or less than you would pay using the conventional way of accounting for VAT. Further details of the Flat Rate Scheme can be found here.
If your customers are private individuals and unable to recover the VAT you charge them, they will have to pay more for your goods or services. This is likely to affect your competitiveness. If you would be able to increase your prices then for every £1.20 of income you would be paying £0.20 to HM Revenue & Customs. Therefore, it is often, but not always, better to remain unregistered if your turnover remains below the threshold.
Some traders operating below the registration threshold choose to register voluntarily because they want to recover the VAT on their costs, especially if they have bought some expensive equipment. Some traders feel that having a VAT number gives them more credibility in the marketplace.
For a start-up business, even with projected turnover over the £85,000 registration threshold in the first year, it might be advantageous to delay registering until it becomes compulsory to do so. Equally, depending on your individual circumstances, it might be beneficial to register even where the turnover is below the threshold.
Please talk to us about your business plans so we can advise you at which point on your business development it would be most advantageous