Becoming a VAT registered business is an important step for any business. At a certain point, it's compulsory for you to register but there are many advantages and disadvantages as to why you might want to register for VAT voluntarily. To help you figure out what's best for your company's needs, as well as your customers, we have a few key points on what you need to know when contemplating such a switch.
What is VAT?
VAT - also known as Value Added Tax - is an additional charge made on the sales of goods and services. It's only made by VAT registered companies within the UK. The current VAT rate is 20%. By becoming VAT registered, in a way, you become a form of mini tax collector for the HMRC as you're collecting the funds on behalf of them. By doing so, you're also entitled to claim back the VAT you've been charged when buying products and services, which is where it can become very useful for a growing business.
When do I need to register for VAT?
Once your business has a taxable turnover for any consecutive 12 month period of over £85,000, it's compulsory for you to register for VAT. This rate has been set to remain for two years from 1 April 2018 but it is possible for it to increase in future years.
If you don't register within 30 days, you might face a considerable fine so it's important that you register as soon as you have to.
What about when your turnover is below that figure? There are still reasons why you may want to register for VAT. Here's a look at the pros and cons.
Advantages of becoming VAT registered
- You can reclaim any VAT that you're charged for when you pay for goods or services. The VAT you pay could end up being more than the VAT you collect from your customers, which means you can receive the difference back from HMRC, thereby saving you some money.
- If you have many business customers, they can claim back the VAT you charge (providing they're also VAT registered), saving them money and ensuring you look more attractive than a non VAT registered firm.
- If you know your business is growing rapidly and you're nearing the threshold, it can be worthwhile registering early rather than later. That way, you're prepared for changes and you can adapt on your terms.
- It also looks good in the eyes of other businesses and clients. You look like a serious contender within your field. And potentially one that has a much higher turnover than you do in reality.
Disadvantages of becoming VAT registered
- You may end up paying more to HMRC. It depends on if you sell more goods and services to your customers than you spend on things for your business. Not that you have a choice if you're over the threshold, of course.
- There's a lot more paperwork. You need to track the VAT you're collecting on behalf of HMRC so you need to file an additional return related to it. That's where services like Mazuma Money can help you significantly, doing the hard work for you. Have a look at our blog about VAT returns for more information.
- You have to pass on higher prices to your customers. That's not much of a problem if your main clients are VAT registered businesses as they can claim it back too. However, if you're dealing with the general public, they may not take kindly to a 20% price increase.
Who can't register for VAT?
If you primarily sell goods or services that are exempt from VAT, you can't become VAT registered. Check beforehand that you're eligible to register for VAT and your business isn't one of the exemptions.
Choosing a VAT scheme
There are three main types of VAT schemes.
- The VAT flat rate scheme is only eligible for businesses with less than £150,000 turnover. It's designed to make record keeping more simple by allowing you to apply a fixed-rate percentage to turnover, depending on your industry.
- The VAT cash accounting scheme is for companies with a turnover of less than £1.35m. You only have to pay VAT on your sales once you've received payment from your customers. This is useful if you want to avoid cashflow issues as you don't have to pay VAT back to HMRC before you've received the money from your clients.
- There's also the annual accounting scheme which has your business submitting one annual return rather than doing VAT returns quarterly. You need to make advanced payments based on estimated amounts from your previous year's returns. If your business is relatively stable, it makes sense in some cases to pursue this method.
What should I do?
If you're confused about whether you should become VAT registered or which VAT scheme to pursue, give us a call at Mazuma. Our services take care of your bookkeeping, VAT, payroll, accounts, and tax so you don't have to worry about a thing. You can focus on running your business instead.