Do I need to register for VAT?

VAT registration

If you’re a small business owner, you may be considering registering for VAT (Value Added Tax) to help your business grow.

VAT registration can be a significant step for a business, and there are many factors to consider before making the decision. Let’s have a look what you need to think about before registering for VAT.

If you’re thinking about deregistering for VAT, we have another blog focusing on what you need to know here.


What is VAT?

First of all, what is VAT anyway?

VAT was introduced in the UK in 1973, and is a tax on the value added to a product or service at every stage of production or distribution.

The tax is paid by the end consumer, but businesses are responsible for collecting the VAT and paying it to the tax office.

The current standard rate of VAT in the UK is 20%, although some products and services have reduced rates, or are exempt from VAT (meaning you don’t have to charge VAT).


Do you need to register for VAT?

The first thing to consider is whether you need to register for VAT.

If your turnover (the amount of money your business earns in selling products or services) is over the VAT threshold (which will be £90,000 from April 2024) you must register for VAT.

However, if your turnover is below this threshold, you can voluntarily register.

If you choose to register for VAT, you’ll need to charge VAT on your goods or services and submit regular VAT returns to HMRC (HM Revenue and Customs).

This can be a time-consuming process, so it’s important to weigh up the benefits and drawbacks before making a decision.


What if I’m not based in the UK, but sell to the UK?

If you and your business are based outside the UK, but sell products or services into the UK, you will have to register for VAT.

There is no registration threshold, so all your UK sales will be VATable.

In this instance you are classed as a Non-Established Taxable Person (NETPs) and new rules came into force on 1 December 2012, stating that the VAT thresholds do not apply.

More info from HMRC here, but please get in touch if you think this applies to you, as we can liaise with HMRC on your behalf.


What are the benefits of VAT registration?

There are several benefits to registering for VAT:

Increased credibility:

  • VAT registration can make your business appear more professional and established, which can help to attract new customers and suppliers.
  • It also looks like your turnover is over the VAT threshold (currently £90,000) even if you’ve voluntarily registered.

Reclaiming VAT:

  • If you’re VAT registered, you can reclaim the VAT you’ve paid on business expenses, such as equipment, supplies, and services.
  • This can help to reduce your costs and improve your cash flow.

Compliance:

  • VAT registration ensures that your business is compliant with UK tax laws and regulations.
  • It also makes sure you’re keeping your records and numbers up to date, as VAT returns usually have to be completed and submitted quarterly to the VAT office.

What are the drawbacks of VAT registration?

There are also some drawbacks to VAT registration:

Increased pricing:

  • Charging VAT can increase the price of your goods or services, which may put off some customers, particularly if they’re not VAT registered themselves.
    • As an example, if you usually charge £1,000 to install a boiler in someone’s home, your price will increase by 20%, so you’re now charging £1,200. A homeowner can’t claim the VAT back, so you’re now costing £200 more.
    • This isn’t a problem if most of your competitors are also VAT registered, but if they aren’t, you’re suddently 20% more expensive.
  • However, if you’re providing products or services to other businesses, and they’re VAT registered, they will be able to claim the VAT back on their own VAT return.
    • So in this case, if you charge £1,000 for services, and add 20% VAT on, your invoice will be for £1,200, but the cost to your VAT registered customer is still only £1,000, as they’ll claim the £200 back from the VAT office on their own VAT return.

Administration:

  • VAT registration requires additional administration, including submitting regular VAT returns and keeping accurate records. This can be time-consuming and may require additional staff or software.
  • It also requires a knowledge of VAT rules and what you can and cant’ claim VAT on, as it’s quite a minefield!

Increased costs:

  • You didn’t set up in business to manage your bookkeeping and VAT returns (unless you’re an accountant or bookkeeper!) so this isn’t an area where you should be spending your time. You should be focusing on what you’re best at, and building your business.
  • There may be additional costs for you if you engage an experienced bookkeeper or accountant to manage this area for you, but the benefits will far outweigh the costs.
  • You’ll have peace of mind that everything is being managed correctly, including VAT being declared and claimed correctly, and deadlines being met.
  • Check out our blog on why you should get us to do your bookkeeping.

Cash flow:

  • If you’re VAT registered, you’ll need to pay VAT to HMRC even if your customers haven’t paid you yet. This can put pressure on your cash flow and may require you to take out loans or use overdraft facilities.
  • However, if you choose the “cash basis” for your VAT returns, you only declare VAT when your customers have paid you.
  • On the same basis, you can also only claim VAT back when you’ve paid for products and services.

How do I submit a VAT return?

As mentioned above, the best course of action is to get an experienced and qualified bookkeeper or accountant to manage your VAT returns for you, as this will save you time, and make sure that VAT returns are submitted accurately and on time.

Check out how much our fees are, for an idea of how much it will cost you to get an expert to complete your VAT returns.

If you want to complete your own VAT return, we always recommend Xero accounting software, as it’s all online, regularly updated, and links straight to HMRC.

Here’s more info from Xero on submitting VAT returns.


How often do I have to submit a VAT return?

Quarterly VAT returns

VAT returns are usually submitted every 3 months, and the VAT office will tell you what your VAT quarters are. When you register for VAT you can choose your VAT quarters, and we usually recommend tying these in with your financial year.

Annual VAT returns

There is also an annual accounting scheme, where you only submit one VAT return each year.

However you have to make monthly VAT payments by direct debit, usually estimated on your previous VAT return.

Drawbacks of annual VAT returns:

There’s no incentive to keep your records up to date, and a danger that you only do this once a year. No good for accurate and reliable numbers!

The monthly payments are estimated on your previous VAT return, so you could be paying the wrong amount all year.


How do I register for VAT?

You will need to go to HMRC online and register.

All the details and the online registration form here


Conclusion

Registering for VAT is a significant decision for any small business owner.

Before making a decision, it’s important to consider the benefits and drawbacks of VAT registration, as well as the impact it could have on your cash flow, administration, and customer relationships.

If you’re unsure whether VAT registration is right for your business, it’s always a good idea to seek advice from a qualified accountant or tax specialist.

Get in touch today if you’d like a chat!

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