Should I Register for VAT?

Photo by Adeolu Eletu on Unsplash

VAT is a tax applied to goods and services offered by a business. Currently the standard VAT rate is 20% and you’ll see this applied to the majority of taxable goods and services in the UK. There is also a reduced rate of 5% and a zero rate. Zero rated items include young children’s clothing, books and most food. It’s important for a business owner to know which VAT rates apply to their products.

You may have to register for VAT because your business exceeds the VAT registration threshold, or you may choose to voluntarily register. In this blog post we’ll explore both scenarios so you can decide if it’s time to register your business.

The VAT registration threshold

 Currently, the VAT registration threshold is £85,000. If your ‘taxable supplies’ exceeds £85,000 in any 12-month period, you must register for VAT. This applies to a rolling 12-month period – even if those 12 months fall in different calendar or financial years.

You must also register if you believe your VAT taxable turnover will exceed £85,000 in the next 30 day period.

Taxable supplies are anything subject to VAT; primarily the goods and services you sell. The threshold applies to turnover not profit – so some business may find they reach the threshold very quickly.

For further information about who should register, how to register, the different VAT rates and much more, read this notice from HM Revenue & Customs.

Voluntary registration

Some business owners chose to register for VAT voluntarily. You can do this at any point, no matter how far from the threshold you are. However, you shouldn’t make the decision lightly as there are as many cons as there are pros. Here are the main ones:

The pros of VAT registration

-          You can reclaim the VAT you are charged by other businesses. Charging VAT on your goods and services is known as output tax, paying VAT on things you buy for your business is known as input tax. If your input tax exceeds your output tax in a given period, you are able to reclaim the difference from HMRC.

-          VAT registration can create the impression that your company is much bigger than it is. Some business owners use this to impress clients, or improve their positioning amongst competitors.

-          Registering for VAT allows you to focus on expanding and growing your business without having to keep an eye on the threshold.

The cons of VAT registration

-          If your output tax (the VAT you charge) exceeds your input tax (the VAT you pay), you will have to pay the difference to HMRC.

-          VAT registration means more paperwork. You’ll have to file a quarterly VAT return so you’ll need to start doing VAT bookkeeping. If you file VAT returns late, or are late making any payments, you may face significant penalties.

-          You might need to increase your prices, which can be off-putting for customers (especially the general public) who can’t claim back their VAT.

As you can see, making the decision to become VAT registered isn’t a simple one, but I hope this guide has helped clarify some points. If you need further help with VAT, get in touch.