All start-up businesses need to know when to register for VAT and in what circumstances it might be advantageous to register early for VAT.
VAT or value added tax is a sales tax that usually adds 20% to most services and products.
Unfortunately, as a VAT registered business you unfortunately become an unpaid tax collector in that you will need to charge VAT on your supplies, collect the taxes and pay it over to the Revenue, usually on a quarterly basis.
Being VAT registered for most businesses is not a choice. It is compulsory when your business reaches a certain size and there are strict penalties charged if you do not comply.
Compulsory VAT registration
Most businesses are obliged to register for VAT when their vatable turnover exceeds the VAT threshold, which for the tax year 2018-19 was £85,000. The government have given advance notification that this limit will be frozen at current levels until 31st March 2022.
Please note that your vatable turnover is not necessarily your actual turnover. Your actual turnover may include a number of items that are considered exempt from VAT and therefore need to be excluded from the calculation. Exempt sales include items such as the supply of financial services, selling insurance or rental income from properties and many other items.
Your vatable turnover also excludes the sale of products or services that you make to any customer outside of the EU. So for example, if you sold to America you do not have to charge VAT and this turnover is not included within your vatable turnover. Similarly, if you sell goods and services to an EU business then this also falls outside the scope of UK VAT and is not included in your turnover. But sales to individuals within the EU will still be liable to UK VAT and therefore will be included in your vatable turnover.
For some businesses yes, but for most businesses your actual turnover will equal your vatable turnover. If you are unsure then we would recommend you call us.
Once you know what is included in vatable turnover, you need to consider when you need to register for VAT. In broad terms, there are two occasions that trigger a registration requirement.
Firstly, if you know that within the next thirty days your supplies are going to exceed the VAT threshold then you need to register immediately. For most start-ups however, this won’t apply as it may take several months to reach the VAT threshold. The rule as to when you should register is then based on your cumulative turnover over a period up to twelve months. When you exceed the VAT threshold, you have thirty days to register.
For example, if after ten months your turnover to say 30th September exceeded the VAT threshold, you will need to register on 1st November. Similarly, if you have been trading for three or four years and then your turnover exceeds the VAT threshold during the twelve months ended say 31st March, then you need to register for VAT on 1st May.
To reiterate, VAT registration is based on a rolling twelve month period and not based on your accounting period. There are other situations when you will need to register so again, please seek advice.
Now you know when you have to register, let’s consider when you might actually decide to voluntarily register. To consider this, we must look at your customers. Your customers will be either 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. For example you have a plumbing business which has secured a contract with a VAT registered business. The contract involves buying goods costing £6,000 which includes VAT totaling £1,000. It may make sense to be VAT registered from day one. Not only can you reclaim VAT on the goods you are buying, but also all the VAT on your overheads and your set-up costs. Your customer who is already VAT registered will not mind as they can recover the VAT you charge them. VAT registration in this situation could make a substantial difference to what you charge to your customer and the profit you can 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 plumbing work was with an individual then you would probably not want to be VAT registered as you would need to charge VAT on your labour cost as well as the material cost, potentially making you more expensive than your non VAT registered competitors.
There could of course be other reasons to register. If you have incurred significant up-front costs you might want to recover the VAT early. Also some people register for the kudos – if you are VAT registered the perception is that you have a large business.
Ultimately however, when your business grows you will inevitably have to register. Do not fight the inevitable, plan for it. VAT will have an impact on your business, but stifling your business to keep below the VAT threshold can be more damaging still.
Whatever you decide to do, we strongly recommend that you seek advice on VAT registration immediately. VAT cannot be ignored so if this blog has triggered concerns or thoughts then why not arrange a meeting with one of our team.
The content in this blog is correct as at 6th March 2019. See terms and conditions.