VAT at first can be scary and feel complicated. However, when you know the steps to do it, it can be quite straight forward.
Watch our video to learn the benefits of early VAT registration.
Do I have to register for VAT?
You must register for VAT if you meet any of this criteria:
- Your taxable sales exceed the registration threshold in the previous 12 months. Currently, this threshold is £85,000. However, this is not the case if you believe that these taxable supplies will not exceed £83,000 in the next 12 months.
- Your taxable sales are expected to be more than the £85,000 in the next 30 days.
- Your business takes over another business who meet the points above.
How could I benefit from VAT registration?
You could save on tax if your business voluntarily registers for VAT even if your turnover is below the threshold. This is especially the case if your clients are organisations who can reclaim VAT themselves.
Here is an example:
Ed is a non-VAT registered builder and a basic rate taxpayer. Most of his customers are businesses.
He buys a new ladder that costs £150 plus VAT, which is a total of £180.
This can be set against his profits for income tax purposes.
As Ed is a basic rate taxpayer, he pays tax at 20%. Therefore, his tax bill is reduced by £36 – 20% of £180.
This means the ladder actually cost Ed £144 after all tax allowances.
Now, if Ed was VAT registered the £30 of VAT can be reclaimed and the £150 ladder can then be set against the company’s profits.
So, the income tax reduction is now £30, ie 20% of £150.
This means that the ladder now would cost him £120 after all tax allowances, ie the total cost of £180 less £30 VAT and £30 income tax.
This has saved Ed £24.
But what if I still want to stay as a non-VAT registered business?
You may feel that you are disadvantaged compared to those who aren’t VAT registered because you will have to add 20% of VAT to your sales. This is usually the case if your customers are the general public, ie because they can’t reclaim the VAT.
In our example of Ed the builder, his residential customers might not want to pay an extra 20%…..and might go somewhere else for their work.
If you want to stay non-VAT registered, you can stay under the threshold through supplying labour-only services and getting your customers to buy any goods needed themselves.
For example, Taylor is a non-VAT electrician, and her turnover is close to the VAT registration threshold.
She could ask her customers to buy the necessary equipment from a DIY store.
This will reduce Taylor’s annual turnover for VAT purposes as she has not bought or sold the equipment.
Although they will pay VAT for the materials from the DIY store, they won’t have to pay VAT on Taylor’s labour.
How will VAT registration help me?
Deciding whether to voluntarily register for VAT is a big decision that should be thought through carefully. Here are some positives of VAT registering:
- Reclaiming VAT – although you will have to charge Output VAT on your sales, you will be able to reclaim the Input VAT on your purchases. If the input tax is greater than the output tax you will be able to reclaim the difference from HMRC.
- Marketplace perception – You could register for VAT to appear larger than your company is. Some customers will be aware of the threshold and, if your company is not VAT registered, they will know that your turnover is less than the threshold. So, if you did register you may appear stronger compared to your competitors and also in the eyes of your clients.
If you’d like to know any more about VAT registration, please get in touch with us.