When do I have to register for VATIf your business is making a turnover of more than £85,000 in any consecutive 12-month cycle, you will be expected to register for VAT by the next calendar month. To make sure that your company is above board and not illegally making more than £85,000 without being VAT registered, you will need to keep meticulous records. Because the amount of £85,000 is based on turnover and not profit, even smaller businesses may find themselves falling over the threshold and having to become VAT-registered. If your business makes less than £85,000 in turnover within a 12-month cycle, you will have the option to register for VAT if you wish to do so.
The pros of voluntarily registering for VATMany business owners don’t see the value in voluntarily registering for VAT. It is a tax, after all. But there are a few advantages of being VAT-registered, which include:
- Reclaim VAT- If you’re VAT-registered you’re able to reclaim VAT on all the goods and services you buy. The input tax is the tax you pay on goods and services, and the output tax is the VAT you charge. If your input is higher than your output, you are able to claim this back through the HMRC. If your business needs to invest in expensive equipment and products, being registered for VAT could definitely be beneficial.
- An increased cash flow- Because you are charging more for goods and services, you can expect to see a higher cash flow in your business, which always looks good to investors.
- More companies and clients will want to work with you- There are many clients, lenders, buyers, insurers, and suppliers that only want to work with VAT-registered companies. So being VAT-registered could open doors to new business connections and grant you further opportunities.
- Create a good first impression- There is something official and impressive about being VAT-registered. It makes your company seem legitimate and trustworthy from the get-go and definitely creates a good first impression.
The cons of voluntarily registering for VATDespite the advantages of being VAT-registered, it does not come without its downfalls, some of which include:
- You will need to charge more for your products and services- Once you have registered for VAT, you’ll need to charge an additional amount because you’ll have to charge your clients VAT. This may cause the cost of your products to skyrocket, and you may find yourself losing some customers. It will not matter so much to VAT-registered clients as they’ll be able to reclaim this VAT.
- You’ll end up costing more than your competition- If the majority of your client base are just members of the public, they are not going to be able to reclaim the VAT on your products and services, and these customers may migrate towards your competition who may be able to offer lower prices as they are not VAT-registered.
- Increased admin- Once you register for VAT, you’ll definitely find that administration and record-keeping becomes more time consuming as you’ll need to ensure that you’re charging the right amount of VAT (usually 20%), that VAT gets paid to HMRC on time, and that you keep meticulous VAT records to assist you when it comes to submitting your VAT returns.
- Missing out on VAT benefits- because of the complexity of the VAT process, small mistakes could cause you to miss out on the benefits that being VAT registered has to offer.
- Unexpected costs- the unexpected costs involved with being VAT registered is potentially having to hire a VAT professional. This is necessary for many businesses as the VAT process is quite challenging if you don’t have an accounting background. The other expense is penalties for not submitting VAT forms on time etc.
How do I register for VAT?If you have decided that you want to voluntarily register for VAT, or if you fall within the necessary threshold, you can register for VAT on HMRC’s site using their online service. Alternatively, you can write to the HMRC by using their VAT1 form. Ensure that you have all necessary business details available to you, such as turnover, bank details etc. Once you have completed the registration, you should receive an official certificate from HMRC within two weeks.
Should I register for VAT if I don’t need to?There is no way to give a simple answer to this question, as the right decision will depend heavily on what type of business you own, as well as a variety of other factors, including:
- If your clients are VAT registered or not
- How much your VAT expenses come up to
- If you could conceivably add VAT to the cost of your products and services without scaring your customer base away
- If being VAT registered would create better opportunities for your business
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