VAT Registration

When should I become VAT registered?

 Having worked for many years with every type of business the question that crops up again and again is “When should I become VAT registered?”.

For so many business owners VAT registration seems shrouded in mystery. This is because there are advantages and disadvantages of registering that aren’t determined by your company’s turnover.

Confusion reigns because different products and services you sell can have different VAT rates applied.  Some products and services can even be zero rated such as food, children’s clothing and photography.

If you export, VAT rates can differ again depending on which country in the EU you supply to.

To end the confusion here’s an Easy Guide to VAT.

What is VAT?

In simple terms it’s a tax charged on sales made and VAT is currently charged at 20%.  Therefore, a VAT registered company must charge for any sales made.  On the flip side you can also recover VAT incurred from purchases made by your company therefore saving you money.

 Remember some products and services are zero rated so double check with HRMC or an accountant.

When should I register for VAT?

When a company hits a taxable turnover of £82,000 they must become VAT registered with HMRC. Many companies, consultants and freelancers, however, chose to register before they hit the magic number of £82,000 as there are financial gains to be made.

Which VAT Scheme – Flat Rate Tax (FRT) or Standard?

Flat Rate Tax (FRT) is intended to simplify VAT for freelancers and consultants. HMRC expects you to apply the mandatory 20% VAT rate to the services sold but you pay a lesser percentage depending upon the business you are in.

HMRC are keen to encourage sign ups to the Flat Rate and offer an incentive allowing an extra 1% discount to be applied in the first year.

It’s worth bearing in mind that, with FRT, you can’t claim back VAT on business purchases therefore speak to your accountant to discuss the best option for you.

Standard Rate Tax allows you to reclaim 20% VAT on every item that you buy and charge it on what you sell.

Your decision to register and which option to go for depends on the products or services you supply and you should speak to an expert.

When do I pay VAT?

VAT registered businesses must complete an online VAT return every 3 months detailing how much tax you’ve charged and how much you’re claiming. (You can depending upon your circumstances opt for the Annual Accounting scheme which allows you to spread your VAT monthly with one annual filing).

You need to make the VAT payment by the 7th day of the month following your VAT return (if quarter to 31st March then payment due 7th May), unless you have a direct debit in place where payment will be on or around 10th of the month.

If you’re claiming back more than you actually charged the VAT office will repay the difference.

Any delays with VAT returns or payments will result in HMRC fines.

What are the advantages of registering before reaching the VAT threshold?

  • ReclaimVAT on expenses & business purchases – potential savings that can positively affect your bottom line, allow you to invest in better infrastructure and expand the business.
  • Enhancedcredibility – your company can give the perception of being bigger than it is
  • Attract largerclients – you can pitch in the board room to larger companies that only work with VAT registered suppliers

What are disadvantages of registering before reaching the VAT threshold?

  • Admin headache– filing a VAT return every 3 months can be time consuming and you risk HMRC penalties for late VAT returns (penalties increase at an incremental level from 5% to 15% depending on how late your VAT return is).
  • Trackingcash flow and profit is difficult – making returns every 3 months can mean tallying up your monthly profit and cash flow is increasingly difficult to manage
  • Lose loyal customers– you are faced with the choice of increasing your prices at the risk of losing customers or absorbing the 20% and reducing your profit margin

When considering the advantages and disadvantages of VAT registration you must also take into account the type of business you run, the types of businesses you supply to and the types of products or services you supply.

When do I start charging VAT?

You must start charging (and recovering) VAT from the date of registration with HMRC – even if you haven’t received your registration certificate yet.

This a difficult period of limbo for business owners faced with 2 different pricing options. Either you raise your prices or start charging to avoid eating into profits but you do risk losing some customers. Alternatively prices remain the same, you absorb the VAT increase and retain goodwill of your customers but risk reducing your profits.

Whatever my clients’ decision I always advise them to inform customers beforehand detailing when VAT registration is taking place and detailing any price increases.  This can be done by invoice charging the equivalent amount including VAT (but not actually charging VAT) with the annotation that a VAT invoice will follow.

Remember your responsibilities when you register for VAT

  • You must display your registration number onevery invoice
  • Add appropriate VAT 
  • Forward Green Vat 100 form to your accountant on a quarterly basis
  • Pay yourVAT on last day of the month following VAT quarter

Every business is unique. The effect of registering for VAT has a range of pros and cons and its worthwhile talking it over.  You’ll be confident that the decision you make is the right decision for you and your business.

Contact Bruce Wilson for advice on 0141 290 0262 or  or connect via LinkedIn or Twitter.

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