Should I Register for VAT?

When launching a business, there are a number of questions which entrepreneurs typically ask. In addition to whether they should be a sole trader or a limited company, whether or not to register for VAT is a common query.

The amount of VAT a business pays or claims back is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.

In the UK, VAT – or value added tax – was introduced in 1973 and replaced Purchase Tax. VAT is levied on most goods and services provided by registered businesses in the UK and the standard VAT rate is currently 20%. There are some goods and services which are exempt, such as the majority of food, antiques, goods donated to charity shops and children’s clothing.

The simple answer as to whether your business should register for VAT or not is whether your turnover will exceed £90,000. However, it isn’t quite that simple. VAT calculations are not linked to the accounting year end but rather on a rolling 12-month basis, which means it’s key to monitor your turnover monthly, rather than waiting to the end of the tax year.

You can chose to register your business, even if your turnover is less than £90,000. We’d suggest that if your turnover is heading towards £80,000, that’s a sensible time to consider planning to go VAT registered.

If your business is likely to take off in the first year and could well exceed £90,000 in turnover, then it is worth registering for VAT from the outset. This means you will have the mechanisms in place and, during the launch phase of your business, you’ll be able to reclaim the VAT on any initial costs that have VAT on them. It also means that your clients will be used, from the outset, to paying VAT – rather than being surprised with a larger invoice further down the road.

Of course, it will depend a little on the business you’re in. You might find that your customers are VAT registered themselves and they will be used to seeing it included on a bill. If you’re dealing direct with the public – who won’t be able to claim it back – then you might find it is more competitive not to be charging it.

If you register for VAT at a later stage, then HMRC does allow you to reclaim VAT on four years’ worth of goods and six months of services.

If you are a small business, you may benefit from the Flat Rate Scheme, which will see you pay a fixed rate of VAT to HMRC. To join this scheme, your VAT turnover must be £150,000 or less.

The flat rate you use usually depends on your business type and you get a 1% discount if you’re in your first year as a VAT registered business. The flat rate varies; for instance, it’s 14.5% for legal services, 11% for a photographer and 7.5% for a food wholesaler.

Becoming VAT registered is a big change to any business and alters the way in which you present your accounts to HMRC. If you creep over the VAT threshold and either don’t realise or don’t do anything about it, it can leave a fairly large hole for you to dig yourself out of. It really is worth reviewing where your business is to prevent this happening.

It’s also worth being in mind that all VAT registered businesses need to be signed up to Making Tax Digital for VAT. This means you need to keep VAT records and submit VAT Returns using compatible software.

If you’ve got any questions about this complex area of tax, so do get in touch with us on tel: 01892 513515