Even if you’re new to business, you’ll almost certainly have heard of VAT, or value added tax. It’s that extra charge – usually 20% - that is added when you purchase any taxable goods. As a business, provided the goods or services you sell are taxable, you can register to charge VAT on the sales you make.
If your business turns over more than £85K in any 12-month period, the answer is simple: yes. At this threshold, registering for VAT becomes a legal obligation. This is true whether you are a sole trader or a limited company. (Note that this threshold can change, so it’s worth keeping an eye on the latest regulations.)
However, for the many small businesses that turnover less than the threshold, the question of whether to charge VAT is less straightforward. You don’t have to do it, but it may be beneficial to your business to do so. And while it’s simple to register, there are a lot of things to consider before you commit.
While we’d always recommend a consultation with an accountant before choosing, we’ve put together a few pointers to get you thinking about the factors you’ll need to weigh up.
First the positives. As a VAT registered business, you can claim the VAT back on any business-related purchases you make. This can help with cash flow, and is particularly useful if you’re a new business and need to buy a lot of equipment up-front. More established businesses can benefit too: you can backdate any taxable purchases you’ve made for the last 4 years (provided you kept those receipts!).
There’s also the question of perception. VAT-registered businesses just seem more established. Clients thinking of spending a lot of money with you may feel more comfortable if it looks like you turnover more than £85K per year. Some companies even say they’ll only work with other VAT-registered businesses. If you’re hoping to land major clients, it’s certainly worth considering.
Or Not To VAT?
So why wouldn’t you register? Well, being VAT-registered can mean more paperwork as you’ll have to submit monthly, quarterly or annual VAT returns. This means totting up the amount of VAT you’ve charged, subtracting the amount you’ve been charged, and letting HMRC know. Good news: if you’ve paid more than you’ve charged, you will get a refund – always handy for the cash flow! Bad news: late returns can come with hefty fines, so you’ll need to be on top of your paperwork. (You could also opt for our award-winning VAT returns service.)
Registering for VAT might also mean that your customers see an increase in your prices. If your customers are largely other VAT-registered businesses, this shouldn’t matter as they will be able to claim the VAT back. But if you sell your goods or services to the public, you will need to ask yourself if they will accept the hike in prices (or if you can absorb it).
Above we’ve outlined the first factors to consider when deciding if you should charge VAT: the ability to claim VAT back on purchases and the benefits of perception, versus the cost of your time and the possible decrease in sales due to inflated prices.
As you may have guessed, VAT is a complex area and there are more factors to consider. Things can change if your business sells overseas for example, or if the goods you sell are applicable to the reduced or zero rate VAT.
At Mazuma, we pride ourselves on making complicated topics like VAT simple to understand and relevant to your business. Our online accountancy service can help you decide whether becoming VAT-registered is right for your business, and advise you on the various payment schemes (Flat Rate or Annual Accounting etc.) that might be right for you.
Get in touch today to discuss your VAT options and work out the best way forward for your business.