You are legally obliged to register for VAT when your business ‘taxable supplies’ within a rolling 12 month period exceeds the VAT threshold. As of 1st April 2016, the VAT threshold was £83,000. This increased to £85,000 from 1st April 2017.
The VAT threshold applies to sales, not profit so a business making regular sales of £6,500-7,500 or more a month of taxable supplies can very quickly reach the VAT threshold. ‘Taxable supplies’ means all goods or services that you supply which according to HMRC have a VAT rating. Zero rated supplies, for example, are still taxable supplies but at a zero rate.
Despite the admin burden, there are sometimes advantages for voluntary registration.
- For new businesses, being VAT registered could give a more professional impression to the customer. This is particularly relevant where you are making business to business sales. It’s likely that your business customers will be VAT registered and therefore able to recover the VAT that you charge them in their own VAT returns.
- VAT registration can make you appear larger and more established than perhaps you really are.
- VAT registration will allow you to recover the VAT on any purchases that you make and therefore reduce your costs.
- If you are still in startup, then you can recover the VAT on some of your start up costs which again reduces your costs.
- Some businesses that sell zero rated products or services may still be able to reclaim the VAT on the purchases if they are VAT registered.
- If a large proportion of your customers are not VAT registered and are not able to recover the VAT on your sale to them, registering and charging VAT to them will increase their costs and potentially make your fees uncompetitive in your market.
- When the VAT on sales exceeds the VAT on purchases, there is a VAT liability payable to HMRC which requires careful cash flow management to ensure that you have sufficient funds available when your VAT payments are due. Late payments do incur quite heavy penalties.
- There is an additional admin burden in the preparation and submission of VAT returns, however a good accounting system such a Xero can make this much easier for you. You can even get your accountant to check your return before you submit it to HMRC. We can help you with that.
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