VAT registration is something that every business should give some thought to. You must register your business for VAT with HM Revenue and Customs (HMRC) if the VAT taxable turnover is more than £85,000, the current VAT threshold.
If your business is not quite there yet, you may be asking yourself if there are any benefits to register voluntarily before you reach the threshold.
Scenario 1: Sales for the past 12 months have exceeded £85,000
You only need to register compulsorily if either:
• Your VAT taxable turnover is more than £85,000 for the past 12 months.
• You believe that your turnover will pass the threshold within the next 30 days.
It is worth noting that unlike some other taxes, there is no VAT financial year with a clear cut start and end date. You should always consider your turnover for VAT purposes is on a rolling basis.
Your VAT taxable turnover and your turnover may not be the same figure. For your VAT taxable turnover you should ignore turnover which is
• exempt from VAT
• outside the scope of the UK VAT system
This is HMRC’s guidance on what is exempt from VAT.
Scenario 2: A sole trader with multiple businesses
Turnover for limited companies is clear cut. It can however get a little confusing for soletrader.
A sole trader may have multiple businesses. In this case, it is important to include all the turnover from the different businesses.
While residential property rental income is exempt from VAT, income from Furnished Holiday Lettings is VAT taxable turnover.
Scenario 3: Your clients are VAT-registered
If your clients are VAT-registered and not using the Flat Rate Scheme, then they will reclaim any VAT that you charge back from HMRC. So, your VAT will only have a temporary cashflow impact for your clients.
On the other hand, being VAT-registered yourself and not using the Flat Rate Scheme will allow you to reclaim any VAT suffered back from HMRC.
If your clients are not VAT-registered or are VAT-registered and using the Flat Rate Scheme, then they will not be able to reclaim any VAT back from HMRC.
Scenario 4: Fast-growing business
There is a cost associated with making changes to the way you do business.
If your business is fast-growing, you will need to register for VAT eventually. It is worth considering to register for VAT from the very start of the business as there will be benefits:
• Your clients will be used to paying VAT and there will be no awkwardness when you need to adjust your pricing
• You can reclaim the VAT on your start-up costs
• All the systems will be in place taking into account that you are VAT registered and will not require changes
Scenario 5: Fake it until you make it?
Some clients and industries will require your business to be VAT-registered for you to be taken seriously. Even though being VAT-registered from the start may not be the best financial decision, it may be the best strategic decision.