Should I Register for VAT?

Should i register for VAT

You’re a new small business, one of the things you’ll want to know the answer of is “should I register for VAT”? 

Many people are a obliged to charge VAT once they hit £85,000 but many people opt to voluntarily register for VAT. We see a lot of small businesses getting confused on when they should register for VAT. So when should you registe

VAT Definition

VAT is a tax on the end consumer . The standard UK rate of VAT is 20 %. This applies to the majority of goods and services. However, there are two other rates of VAT: a rate of 5% per cent applies to items including children’s car seats and home energy, and the 0% rate applies to essentials like food and children’s clothes. 

Should i register for VAT

Do I have to register for VAT?

So the rules are, if over a course of 12 months trading your “taxable supplies” exceed the VAT threshold then you have to register for VAT. 

The VAT registration threshold is £85,000 in 2019-2020 tax year.  

What are taxable supplies

Taxable supplies are anything which would be subject to VAT, this includes any product or service that is liable for VAT including items charged at 0%. The only items you would exclude would be those which are VAT exempt. You can find the list below: 

  • insurance, finance and credit 
  • education and training
  • fundraising events by charities 
  • subscriptions to membership organisations 
  • selling, leasing and letting of commercial land and buildings – this exemption can be waived 

Unless you are involved in any of the above, use your turnover when determine the value of your “taxable supplies”. 

I am below the threshold, should I voluntarily register for VAT?

o many small businesses choose to register for VAT below £85,000 for many reasons. However, this is a big decision and can have a huge impact on your business if not properly thought through. 

The main reasons to voluntarily register for VAT are: 

  • Reclaiming VAT. Although you will have to charge VAT on your goods and services once you are registered (known as output tax), you will also be able to reclaim VAT that you are charged by other businesses. This is known as input tax. At the start of a business when you have a lot of outgoings this may help you, for example, if you sold £2000 of goods and charged £400 of VAT but spent £10,000 on various start up items and can reclaim £2000, HMRC would then send you £1600.
  • Pricing – You need  to think about your pricing strategy with VAT or without, once you hit £85,000 and you haven’t already incorporated VAT in the pricing strategy then you will be hit with increased prices. If you factor it in or register straight away you don’t need to worry about this as its clear from the start. 
  • Building impressions. Firms which need reputation, can choose to register for VAT in order to appear larger than they are. Clients will know that there is a threshold of £85,000 so ifyour not registered they will know your turnover is below this. To avoid this you can register for VAT as a way of increasing your standing among competition, and in the eyes of clients. This makes your small business seem like a bigger business. 

Why wouldn’t I voluntarily register for VAT?

Despite its benefits, small business being registered for VAT can have downsides. In many cases these downsides make registering for VAT as a small business not worth it. 

  • Higher Prices. As a VAT registered small business you are obliged to charge VAT on any relevant goods or services. You can still reclaim the VAT you pay – but when you become profitable and your output tax (the VAT you charge) exceeds your input tax (the VAT you pay), you will have to pay the difference to HMRC. This therefore makes you appear more expensive (though you should factor VAT in even when you are not registered. If you are not prepared for this, its another cash out flow and with poor planning this may put pressure on your cash balance. 
  • Increased paperwork. VAT registration also requires small businesses to complete a raft of additional paperwork. If your over £85,000 threshold you will also need to register for Making Tax Digital – this makes  you use software to submit your VAT return see our guide on software. Small businesses who voluntarily register for VAT will not have to be part of the Making Tax Digital schemeThose small businesses who have to use Making Tax Digital will normally have to file a quarterly VAT return via software, and you will have to implement VAT accounting into your existing accounting and bookkeeping systemIf this is the case we recommend upgrading to cloud accounting software, it makes sense as it will not only improve Making Tax Digital Compliance, it will also improve your bookkeeping and control of the business. 


Can I deregister for VAT?

Sometimes small businesses’ circumstances change and you may want to deregister for VAT. While this should be a simple process, HMRC can be difficult to convince. 

Small businesses can deregister from VAT if they are below the threshold of £83,000. You can deregister your business if its turnover or taxable supplies will not exceed the threshold in the next 12 months. If you registered voluntarily and your business has not yet reached this threshold, HMRC should be quite happy with this. However,if your turnover has previously exceeded the threshold, HMRC may want more information on why you think it won’t exceed £85,000 next year. 

Small business have to  deregister from VAT if the business stops making taxable supplies , or if it becomes part of another VAT group.  

VAT registration needs to be considered at the very start of small business. You should always think about it when pricing your items, VAT or not VAT. Those small businesses thinking about voluntary registration can be discouraged by the  prospect of increased software requirements and the potential for a hefty bill from HMRC. VAT registration can still be a great financial decision.  Small businesses need to make sure they properly consider the pros and cons of registering for VAT, if in any doubt seek advice from and accountant. 

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Ben Sztejka ACA

Ben Sztejka ACA

I am an ICAEW Chartered Accountant with one core belief, make accounting as pain free as possible and focus on adding value to businesses.

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