To be or not to be VAT registered

A common question for many businesses is whether they should register for Value Added Tax (VAT). Unsurprisingly, VAT is a complex area, so if you’re not totally clear on it, don’t worry, you’re not alone. There have been some high-profile VAT legal cases over the years involving large corporations who have fallen foul of the rules. Through this blog, I’ll give you a basic overview of VAT and some important points to remember when considering your decision.

What is VAT?

VAT is a tax on consumer spending, added to the sale of goods or services and collected by the business on behalf of HM Customs and Revenue (HMRC). The amount paid to HMRC is the total VAT charged to customers minus the VAT paid on the businesses’ purchases. Any differences in amounts you owe or that should be refunded to you are sorted out through your VAT tax return to HMRC. VAT is currently set at 20% for the standard rate.

Which businesses can charge VAT?

You can only charge VAT if your business is VAT registered. If your VAT taxable turnover (excluding any turnover which is VAT exempt, for example from insurance or stamps) is over the VAT threshold in any 12-month period, you must register for VAT. The registration threshold is currently £85,000. If your turnover temporarily exceeds the registration threshold, you may be allowed an ‘exception from registration’.

If your turnover is less than the VAT registration threshold, you can choose to voluntarily register for VAT.

Why would you voluntarily register for VAT?

  • If you register for VAT voluntarily, you will be able to reclaim any VAT that you’ve paid on goods and services.
  • If you mainly sell goods or services to VAT registered businesses, you’ll be able to add VAT to your goods or services without being price sensitive.
  • Your business can appear larger than it is.

Why wouldn’t you voluntarily register for VAT?

  • You’ll need to spend more time on administration with additional paperwork and filing your VAT returns. That said, you can minimise the time you spend by using accounting software.
  • If you have minimal costs which attract VAT, it may not be worthwhile.
  • If your clients are consumers who are price sensitive or smaller businesses that are generally not VAT registered, you may price yourself out of your market.

Can your business de-register for VAT?

If your turnover won’t exceed the VAT registration threshold in the next 12 months, you can apply to HMRC to de-register. You’ll need to convince HMRC that your turnover won’t exceed the threshold. You can also apply to de-register if your business stops making taxable supplies, is sold or changes legal structure (e.g. sole trader to a limited company).

This has been a very basic overview of the system, so if you’d like individual advice on whether you should register for VAT, please call me on 01604 330220 or send me an email.