Should I register for VAT?
Tips for businesses on how to improve finances often cover the “usual” things that you can do to save money but registering early for VAT is rarely discussed. Despite this, it can be a wise consideration for businesses to make for several reasons.
VAT registration becomes compulsory when your business reaches a total turnover of £85,000 (for 2019/2020) over the 12 months period – note that’s total turnover, not just profit. If your business is on track to reach this figure in the next 30 days, you must register too.
But you can become VAT registered at any time, and many businesses choose to register early. Here are some reasons why.
What is VAT?
Everyone deals with VAT in one way or another daily, but few know much more about it. VAT is a tax charged on applicable goods and services by VAT registered businesses. VAT is generally added on the sale price of an item, to make the total cost.
A VAT registered business can also claim back VAT that they themselves have paid on goods and services.
What are the benefits of VAT registration?
The first thing to know is that VAT registration is only optional if your business currently turns over less than £85,000 in a 12-month period. That’s the figure for 2019/20, the limits are subject to change.
You will have to pay VAT on all the goods and services you use as a business when dealing with another VAT registered business. But the offset is that you can actually claim back the VAT that you pay. If it forms part of your regular accounting, your VAT repayments should clear inside ten business days.
Improve business Image
Another benefit of VAT registration is that it can make a small business appear larger and better established than it is. This makes it easier to win the trust of larger clients, investors, suppliers, and lenders, which can naturally have a markedly positive effect on your business.
Few understand that VAT registration can be optional, so they may automatically presume your business turnover to be higher than it is – making your business seem that much better established. A VAT number can be freely displayed on your website, stationery, or invoices, making it easier to win trust.
Claiming VAT from the past
Another clear benefit of VAT registration is you can qualify for backdated payments by as many as four years. This means that every time you have paid VAT in that period, you can claim it back if you’re still using those goods.
The offset of this is, of course, that you will need to provide clear evidence to HMRC, which can be difficult if your filing systems are not up to scratch.
Are there any downsides?
As with anything, there are considerations you need to make before deciding to voluntarily register for VAT.
First is that while VAT registration may improve your business’ appeal to larger clients, lenders, and investors than yourself, it may hamper your appeal to smaller ones. When customers must pay VAT on your goods or services, those prices may become higher than they can afford.
Another is the risk you run of generating a considerable VAT bill. These are most likely to arise if your business is generating more VAT from your goods and services sold than you’re paying on goods and services you’re buying from other VAT registered businesses.
Which VAT scheme should I use?
There are several different VAT schemes open to businesses and so it’s important to consider which is best for your circumstances. Typical schemes include:
The Flat Rate Scheme: This is for businesses with a turnover of less than £150,000. Under this scheme you pay a percentage of your turnover to HMRC, with set rates for individual industries, but can’t claim back VAT you incur on purchases.
Cash Accounting Scheme: This is common among small businesses as you only need to pay HMRC the VAT income you’ve received during a quarter. This does, however, mean that you can’t claim VAT back for any invoices that haven’t been paid. Businesses have to have a turnover below £1.35 million to be able to access this scheme.
Annual Accounting Scheme: Instead of making quarterly returns, this scheme lets you make advance payments towards your bill throughout the year. You then file one VAT return and pay the balance – or claim back a refund for any overpayments. This is only eligible for businesses with a turnover below £1.35 million.
These are the main options, although there are several VAT retails schemes for businesses in that sector.
Getting specialist help
VAT registration is reasonably straightforward but handling the extra admin can cost you valuable time, so it pays to contact a specialist accountant that can help your business handle VAT registration.
All your VAT invoices, receipts, accounts, and records will have to be kept, and accurate VAT returns filed to HMRC every quarter. For any more help or advice on voluntary VAT registration, contact us today.