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Looking to increase your profits? Is it a good idea to voluntarily register for VAT?

8 June 2020
Mark Friend
Ambitious Startups, Reducing Tax, Accounting & Compliance

Below is our video on whether it is a good idea to voluntarily register for VAT.

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Is it a good idea to voluntarily register for VAT?

This is a question often considered by many business owners when they start up in business or during their early years. Businesses need to compulsorily register for VAT when their vatable turnover exceeds the VAT threshold, which for the tax year 2020/21 is £85,000. However if you have just started trading or your turnover is below £85,000 there may be potential benefits of voluntarily registering for VAT.

As a business owner you will in all probability be paying out VAT which if you were VAT registered you could recover.  To consider whether it is a good idea or not to voluntarily register for VAT we need to look at your customers.

Your customers will either be other businesses or consumers or a combination of both. This is known as B2B (business to business) or B2C (business to consumer).

Let’s look at a B2B business. Say you have a fire alarm business, which has secured a contract with a VAT registered business. The contract involves you buying goods costing £6,000, which includes VAT totalling £1,000. In this situation it would be beneficial if you were VAT registered. Not only could you reclaim VAT on the goods you were buying, but also all the VAT on your overheads and your set-up costs if applicable could be reclaimed too. Your customer who is already VAT registered would be fine as the VAT charged would not impact on them as they could recover the VAT you charge. VAT registration in this situation could make a substantial difference to what you charge to your customer and the profit you could make.

In most situations where you are dealing largely B2B you should seriously consider registering for VAT either immediately or as soon as possible.

Conversely, if your contract for a fire alarm is with an individual, or say a landlord, who is not VAT registered then you charging additional VAT on your labour costs could make you more expensive than a competitor. For example if your labour cost is £600 and you have goods inclusive of VAT of £1,000 then as a non VAT registered business if you charged £1,600 your profit is £600. As a VAT registered business if you had to charge £1,600 to win the work your profit would be £500 – a reduction of £100. In general a business which is predominantly B2C should not register for VAT voluntarily.

There could of course be other reasons to voluntarily register. If you have incurred significant up front costs you might want to recover the VAT early. There is also the question of Kudos. If you are VAT registered the perception is that you have a large business.

Whatever you decide to do, we would recommend strongly that you seek advice on VAT registration immediately.

VAT should not be ignored, so if this article has triggered concerns or thoughts then why not arrange a meeting? Please contact us if you wish to discuss VAT registration further.

The content in this blog is correct as at 08/06/2020. See terms and conditions.

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