At the time of this article, the threshold for compulsory VAT registration is if your total taxable turnover for the last 12 months was over £85,000.
However the answer isn’t that simple, as there can be a lot of benefits from registering for VAT before you ever reach that threshold.
We look at some examples when it could be beneficial to register for VAT before reaching the threshold, the benefits and things to consider when weighing up your options.
Example 1. Work that for that falls under the DRC
Bob has a building company, the majority of the work he does falls under the Domestic Reverse Charge (DRC).
His turnover for the year is only £60,000 which is below the compulsory threshold.
However, as his work falls under DRC, there would be no VAT for him to pay on his sales – this is the responsibility of the customer – therefore by VAT registering, it allows Bob to reclaim VAT on his costs without having to pay any VAT over, saving him 20% on all of his VATable costs.
Example 2. Zero rated work
Similar to Bob, Fred is also a builder, however his work does not fall under DRC.
All of the work Fred invoices for is in relation to new build properties which are Zero rated for VAT.
Again regardless of his turnover, Fred could benefit out of VAT registering as he would also be able to reclaim VAT on his costs without needing to pay any VAT on his sales.
Example 3. Private vs commercial
Bruce and Tony are both electricians. Bruce works for private individuals, whereas Tony works for businesses, both have turnover of £75,000. The attraction for both of these would be to register for VAT in order to reclaim VAT on any costs that they can.
There is also a commercial decision that would need to be made here.
For Tony, this wouldn’t be an issue, he is working for VAT registered businesses meaning he could add 20% to his sales as his customers would be able to reclaim this amount.
Bruce on the other hand, has private customers who would not be able to reclaim the VAT. This means that he either has to a) increase his prices by 20% to account for the VAT or b) absorb the VAT cost himself.
Option A could potentially lose him business as he would be more expensive than the competition, Option B could potentially lose him money as ⅙ of his sales income would need to be paid over to HMRC on his sales, this lose is unlikely to be recovered by the VAT reclaimed on his expenses.
Example 4. Sales outside of the UK
Tom has a sole trade business selling toys to customers outside of the UK.
These sales are Zero rated for UK VAT and he is under the impression that he should register for VAT like Fred & Bob above to reclaim some VAT on costs.
Tom also has a couple of rental properties, and as he is a sole trader, this income is included within his taxable turnover.
Residential rental income is exempt from VAT, this then causes an issue that Tom would fall under partial exemption and he would have a percentage of his VAT on expenses potentially blocked depending on the circumstances.
Tom would need to consider the calculations to decide if the cost savings outweigh the additional admin needed to complete a VAT return under partial exemption before going ahead and registering.
Getting VAT Registered
As you can see from the examples above, there are lots of ways you can benefit from becoming VAT registered even if you are below the VAT threshold, however in some circumstances there are other important of factors that need to be considered.
If you are reading this and wondering whether you should be registering for VAT or need help with the registration and what to do next, please contact Luke Anderson or call us on 01634 731390.
If you would like to find out more about some of our services that might help you please take a look at our related pages:
Accounting & Compliance Services
Business Growth Services
Blogs related to VAT
Take a look at our other blogs on the topic of VAT
Five interesting VAT Rules you may not know
Do you need a VAT health check?
The content in this blog is correct as of 16th May 2023. See terms and conditions.