If your turnover has exceeded the VAT registration threshold of £85,000 in the last 12 months, your business must register for VAT with HMRC. This applies to all commercial businesses, including sole traders, partnerships, and limited companies.
However, before reaching the mandatory VAT threshold, you may wish to consider the potential benefits of voluntary VAT registration to your business.
What is VAT?
Value Added Tax (VAT) is a charge made on the sales of goods or services by VAT registered businesses in the UK. The current standard VAT rate is 20%, although on some goods (such as home energy and children’s car seats) a reduced rate of 5% applies. Most food, books, public transport, and children’s clothes are zero rated.
As a VAT registered seller of services or goods, you apply the relevant VAT rate to your invoices and collect the VAT on behalf of HMRC. This is then offset by the amount of VAT that your business has paid to other suppliers in the purchase of goods or services. The balance is payable to HMRC, typically on a quarterly basis.
What are the advantages of VAT registration?
VAT registration suggests that your turnover is over £85,000 (even if it is not) and therefore voluntary registration can indicate that your business is larger than it actually is. As a result, it may be easier to supply bigger organisations, who typically would prefer not to award contracts to micro companies.
From a cash flow perspective too, VAT registration can be a huge advantage. Although the net VAT figure needs to be paid over to HMRC periodically, in the meantime, the 20% VAT charge that you add to your customers’ invoices will be in your bank account, aiding your short-term cash flow. While it is never a good idea to rely on this money as your ‘float’, it may be helpful from time to time, to stop you dipping into your reserves.
Reclaim Input Tax
If you are VAT registered, you can reclaim the VAT that you are charged by other businesses for their goods and services (‘input tax’). Furthermore, if your input tax is more than the output tax (the VAT you collect from your customers), you can collect the difference back from HMRC, saving money.
As a non-registered company, you would still incur this charge, but would not be able to reclaim it.
Ready for Growth
Registering for VAT is a statement of intent for a small business and demonstrates that you are ready for expansion. It shows a willingness to grow and a confident, positive outlook, and will encourage other businesses and potential customers to work with you.
Disadvantages of VAT Registration
Supplying non-VAT registered companies
VAT adds 20% to the sale price of your goods or services, and while this is not necessarily an issue for a fellow VAT registered company (who can reclaim the VAT), those customers (and consumers) who are not VAT-registered will see the price of their purchase increase by 20% (or 5%, depending on the nature of the product). This may lead them to look for another supplier. This is especially true in residential trade settings such as plumbers or electricians.
Extra paperwork and increased administration are unavoidable consequences of VAT registration. Businesses need to keep all VAT invoices and receipts, maintain VAT accounting records, and file VAT returns every quarter. While accounting packages like QuickBooks and Xero will help to automate this process, some intervention is required to ensure the right VAT rates have been applied, and the correct amount of VAT is paid/claimed. Here at Blue Roof, we can help with that of course.
How to register for VAT
VAT registration is completed online via your Government Gateway account (which you will need to create as part of the VAT registration process).
It can take around 2 weeks for HMRC to process your VAT registration application. You should not start charging VAT or showing it on your invoices until you have received your VAT registration number, but you can adjust your prices to reflect the amount of VAT that you plan to charge.
VAT returns are due every quarter and must be submitted to HMRC via your Government Gateway account within one month and 7 days after the end of the VAT period.
VAT payments must be made to HMRC electronically with the deadline for paying VAT the same as the deadline for filing your VAT Return.
Blue Roof Accountants: A Bespoke Service Tailored to Your Specific Needs
At Blue Roof Accountants, we give small business owners proactive, pragmatic advice on how to manage their company finances and reduce their tax burden. From accounts preparation and corporation tax calculation, to personal tax planning and management consultancy, we work with company directors, sole traders, and entrepreneurs throughout the South to help them achieve maximum financial benefit from their business.
If you need straightforward advice from our experienced, friendly team, contact us today on 01202 532288.