VAT registration is a big step for any small business. While many are obliged to register for VAT, others choose to do so voluntarily.
Value Added Tax (VAT) is the sales tax levied against goods and services within the UK. You must register for VAT with HM Revenue and Customs (HMRC) if your business’ VAT taxable turnover is more than £85,000. You can register voluntarily if your turnover is less than £85,000, unless everything you sell is exempt. (Gov.uk)
Registering can be a good financial decision although for some it can have major drawbacks. It is essential to seek advice before making a decision. This is something we can help with.
Let’s take a look at the pros and cons of registering your business for VAT before reaching the threshold.
What are the advantages of registering?
Choosing to register before you reach the £85,000 threshold can have its advantages, particularly if the majority of sales are to other VAT registered businesses.
These can include:
- VAT can be applied to the sale cost of almost all goods and services offered by a business.
- VAT paid by a business on most goods or services it purchases from other businesses can be reclaimed.
- VAT can be reclaimed on assets purchased within the previous four years. So, if you bought a van a couple of years ago, you will probably be able to get the VAT back. This applies to all sorts of items which you bought and still have.
- Small businesses can give the appearance of being larger and more established. This can be appealing to clients, lenders, investors and suppliers who will assume a business has a larger turnover because it is VAT registered.
- VAT-registered businesses are given a VAT number. This can be displayed on invoices, letterheads, websites and other forms of business stationery, which can also be appealing.
What are the disadvantages of registering?
- Charging VAT on certain products and services may be off putting to potential or existing customers, particularly if they themselves are not VAT registered.
- If output tax exceeds input tax, a business will be required to pay the difference to HMRC. This could cause potential problems if a business is faced with a large, unexpected VAT bill.
- VAT registration comes with the added burden of extra administration and paperwork. Accurate VAT accounting records and invoices need to be maintained.
As a rough rule of thumb, consider voluntary registration if the majority of sales are to VAT registered businesses. If the majority of your sales are retail to customers who are not VAT registered, you should generally avoid registering.
However, there are exceptions. If most of your sales are zero rated, for example fruit & veg, meat or other zero rated foodstuffs, voluntary VAT registration will enable you to reclaim VAT you have to pay. This might be on packaging, electricity and even rent. Also, if you know you will have to register soon in any case, it might be worth doing so early to be able to reclaim VAT on assets purchased within the previous four years, particularly if the four year period is nearly over. Each case should be considered on its merits.
When you reach the VAT sales threshold (currently £85,000), you have to register within 30 days. It is therefore very important to keep records of sales because an awful lot of businesses don’t realise they have exceeded the threshold and register late. When this happens HMRC can, and will, charge penalties and interest.
To determine whether the VAT threshold has been reached it is necessary to keep a “rolling record of sales”. This means the previous twelve months, not the businesses trading year (a common misconception). For example, in January you would look at the twelve month period from the previous January – January to December. In February, you would look at the period from the previous February to January and so on.
If most of your sales are to retail customers having to register for VAT will almost certainly have a negative effect on your profits. It is important that you understand this effect because it can be significant, often reducing net profits by 25% or more. Ideally there should be a plan in place well in advance of reaching the threshold. For some smaller businesses it can make economic sense to keep turnover below the VAT threshold – closing for a day or reducing advertising are some of the strategies used.
Selling or Buying overseas
If your business buys from or sells overseas, whether within the EU or the rest of the world, getting the VAT right is important. This is a highly specialist area and we do have experts to call on when needed. If you need to register for VAT in Poland, or Bulgaria or any other EU country, we can deal with this for you.
What if I need to de-register?
You will either cancel your registration on a compulsory or voluntary basis. The main reasons for de-registering would be when you stop making taxable supplies; you sell your business; or your legal status changes (for example from sole proprietor to partnership or Ltd Co.) You can also de-register voluntarily if you expect your turnover to drop below the threshold.
Our advice would be ‘Don’t do it alone and guess at the rules!’
VAT is a complex subject. A large proportion of the queries, enquiries and disputes we have with HMRC relate to VAT. The penalties and fines for getting it wrong are high. Let one of our highly experienced (and friendly) team help you get it right.
All of our clients are covered by “Fee Protection Insurance” where the insurer will pay our costs in dealing with an enquiry or investigation and provide expert help if needed. This comes as standard with all of our packages and covers work carried out by ourselves. Just a little bit extra peace of mind.