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When and why should you register your business for VAT

Posted: 20/08/2014    By: Andy Crawford      Leave comment | None left yet

Tagged: vat,tax

Introduction

Value added tax (VAT) registration, up to a point, is optional for small UK resident businesses. If registration is optional you have to weigh up the pros and cons as once registered you expose yourself to considerable responsibility and the real risk of financial penalties for non compliance. Even if registration is non optional there are still options open to you that need to be examined.

When registered for VAT you are required to charge VAT, whatever your rate maybe for the goods and services you are supplying, on every invoice you raise. However, you are able to claim back any VAT you pay on supplies you purchase for the business. This may result in a net payment to, or net refund from HMRC for any particular VAT period.

When VAT registration is non optional

VAT registration becomes non optional when your annual taxable turnover is expected to pass the limit set by HMRC, or, this limit (please call us on 0808 1787060 and we will be happy to advise on the current taxable turnover limits) is expected to be passed in the next 30 days. If either of these two situations applies to you you will need to respond in a timely manner as there are strict HMRC set time limits to register and late registration can lead to a financial penalty. Non registration could lead to an even larger financial penalty. If you are unsure seek advice from your tax adviser or accountant.

Voluntary VAT registration

If your taxable turnover falls below the limits set by the HMRC you still have to option to voluntarily register for VAT.

Before we look at the advantages of voluntary VAT registration it is important you first consider the VAT registration status of your customers. If the majority of your customers are not VAT registered they will experience a hike in their invoices from you to the tune of the current VAT rate should you decide to VAT register (this is assuming your goods and services are liable to VAT above the zero rate). This may cause friction and, worst of all, customer migration.

However, if the majority of your customers are VAT registered they will see no change in what they actually pay for your goods and services should you decide to register for VAT. Therefore, if you have a large number of suppliers each charging VAT you will be able to start claiming the VAT back and setting it against the VAT you charge on your own invoices for goods and services. Voluntary VAT registration only becomes a viable prospect if this exercise results in a net refund from the HMRC. Otherwise you simply become a non paid tax collector!

VAT flat rate scheme option

Your business may qualify for the VAT flat rate scheme. It is ideally for small businesses who have a taxable turnover over the HMRC annual limit but purchase very few goods and services liable for VAT for the business. Qualification depends on your type of business and annual taxable turnover.

Basically, you only pay the HMRC a lower rate of VAT (rate dependent on your business type) than the standard rate you charge for goods and services, but you cannot claim for the VAT you have paid on goods and services purchased for the business. (However, you may still be able to claim the VAT back on some large ticket capital asset items).

The idea behind this scheme is to dramatically simplify the VAT return process for small businesses. However, you have to consider the financial implications against the convenience of easier VAT returns.

Example of VAT flat rate scheme

Let's assume we have an IT consultant with an annual taxable turnover of £100K. She has registered for VAT and charges 20% on all services provided. She has office rent amounting to £3000 per annum which is inclusive of VAT at 20%. This is the only expense, other than her wages, the business has.

Using the standard VAT system she would owe HRMC,

Amount of VAT charged: £100000 @ 20% = £16666

Amount of VAT paid: £3000 @ 20% = £500

She would therefore owe the HMRC £16666 - £500 = £16166 for the accounting year.

However, if she decided to apply for the VAT flat rate scheme she could qualify for a lower rate, such as 14.5%. So how would that work?

Amount of VAT charged: £100000 @ 20% = £16666

Amount of VAT paid: £3000 @ 20% = £500

However, she is required to pay HMRC 14.5% of her gross (inclusive of VAT) taxable turnover. Therefore,

£100000 x 14.5% = £14500 is what she will owe the HMRC for the accounting year.

Summary

Voluntary VAT registration has to be considered carefully. Simply taking the view that it gives your business credibility could prove costly. Once registered the options can get overwhelming and the burden equally so. It is important you consult your tax adviser or accountant at every step of the way as they will be able to offer the most suitable advice for you and your business.

Quick Books Accountants have a VAT service which covers all the advice you will need through the VAT registration process and also perform your VAT returns in an accurate and timely manner. This enables you to get on and do what you do best, build your business.

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