One of the most common questions business owners ask us as accountants is , "Should I register for VAT?" and the answer is: "It depends."
It depends largely on the turnover. Currently /in August 2023/ the VAT threshold is £85,000; if your sales reach that mark in any 12 consecutive months, you must register. It is compulsory for most businesses in the UK. There are some exemptions; for instance, if you are selling insurance or financial services, I don't want to get too technical here; I just want to state that for most businesses in the UK reaching the VAT threshold means they have to register for VAT. Once registered, you have to charge VAT on top of your sales, collect it from your customers and pay it over to HMRC.
Suppose you have not reached the revenue of £85,000 for 12 months yet. In that case, you can also become a VAT-registered business voluntarily to gain some benefits. This means you have the flexibility to choose when to register, allowing you to manage your cash flow strategically.
If you are an online retailer and you sell your products to private individuals who are unlikely to be VAT registered, then they can not recover the VAT, and it is just an additional cost to them. VAT will only inflate your price, and your clients may not be willing to pay the higher price.
However, if your customers are other VAT-registered businesses, they will not mind whether they are charged VAT or not because they will later claim a refund from HMRC. In this case, your business will be better off registering because it will recover the VAT on your costs. And this tactic isn't at all risky or dishonest – it's estimated that around 20% of all VAT-registered businesses trade below the VAT registration threshold.
1. You will be able to reclaim VAT you are charged when paying for goods and services /your "input tax"/. If the VAT you pay is more than the VAT you collect from your clients /"output tax"/ you will be able to collect the difference back from HMRC and save some money on your costs, and gain a competitive advantage.
2. VAT registration can enhance your business's credibility in the eyes of customers and suppliers. It signals that you are a registered and accountable entity, which may make others more comfortable doing business with you. I know quite a few people who have decided to register their start-up for VAT only for this marketing reason.
3. You can claim past VAT on purchases in the last four years. To claim this, you must still have the item and still use it, but depending on what kind of business you are running, this may be a substantial return.
1. Administrative Burden: VAT compliance comes with a considerable administrative burden. You'll need to keep meticulous records, file VAT returns, and potentially face VAT inspections. This can be time-consuming and may require additional resources.
2. Cash Flow Impact: Charging VAT means your customers will pay more for your goods or services. While you can reclaim input VAT, there may still be a temporary negative impact on your cash flow, particularly for businesses with high-value transactions.
3. Price Sensitivity. Some customers may be price-sensitive and could be discouraged by the higher prices resulting from VAT. This can affect your sales, especially if your competitors are not VAT-registered.
4. Complex VAT Rules: The UK VAT system is complex, with various rates and exemptions. Understanding and complying with these rules can be challenging, and errors can result in penalties or interest charges.
5. Quarterly Reporting: VAT-registered businesses must submit quarterly VAT returns to HM Revenue and Customs (HMRC). This can be onerous for small businesses and may require additional accounting support.
Deciding whether to register for VAT in the UK is a crucial step for any business owner. The choice should be based on careful consideration of your business's circumstances, financial situation, and long-term goals. While VAT registration can provide benefits like credibility, cost reduction, and competitive advantages, it also introduces administrative challenges and price sensitivity concerns.
Ultimately, if your business's turnover approaches or exceeds the VAT registration threshold, it's essential to consult with a tax advisor or accountant to evaluate the specific pros and cons in your situation. We can help you make an informed decision and ensure you comply with HMRC regulations if you choose to register for VAT. Remember that tax laws and regulations may change over time, so staying informed is key to making the best choice for your business. Book your free consultation HERE.
