Whether to register for VAT is a major decision that could have significant financial implications for your company.
Value added tax is the duty the government levies on most goods and services in the UK. However, not every company has to charge VAT on their goods or services.
Some must register to charge VAT. Some do so voluntarily, even if they do not have to, as it brings certain benefits.
It is a complex area, so you should weigh all the facts and options carefully before deciding. An accountant or other adviser who understands the VAT rules can also help.
If your turnover exceeds £85,000 - the current VAT threshold - over any 12-month period, you must register for VAT and charge it on your goods or services. This 12-month period is not fixed like the tax year or calendar year - it could be any 12-month period, for example, July to June. If you hit the threshold, you have 30 days to register.
For most goods and services, you must charge VAT at the standard rate of 20%. For some, such as home energy and child car seats, the charge is a reduced rate of 5%. For a few things, such as food and children’s clothing, VAT is zero.
After registering, you must keep the VAT you charge and pay it over to HMRC, usually one month after the end of each quarter.
Some companies register for VAT voluntarily even if their turnover is under the threshold. Reasons for this include that their turnover has dipped temporarily below the threshold, or because it makes them appear to be a larger, more professional company.
For some companies, registering can also bring financial benefits, depending which of the various VAT schemes they join - explained in more detail below.
Once registered, you must charge VAT on:
The pros and cons of registering for VAT partly depend on whether you use the ‘cash accounting scheme’ or an alternative called the ‘flat rate scheme’. How to choose between these schemes is explained in more detail in this article.
If you use the cash accounting scheme, the main financial benefit is that you can claim back input VAT, which is the VAT on goods and services you buy for your business. If you have lots of VATable costs, this could be a significant benefit.
For some firms, there is a significant financial benefit in registering for the flat rate VAT scheme because they do not have to pay the full 20% they charge their customers back to HMRC – only a smaller percentage.
However, flat rates vary according to what type of company you have. For example, post offices only pay over 4% but professional firms such as solicitors pay 14.5%. So which category you are in will have a major impact on this decision.
In 2017, another rule was introduced for so-called limited cost traders who have minimal expenses. These pay back 16.5%, thus negating nearly all the benefit. Companies in this situation might instead consider using the cash accounting method, which may bring some small savings on input tax; or simply not register at all.
If you offer mainly business-to-business goods or services, your VAT-registered clients on the cash accounting scheme themselves can claim back the VAT you charge them. So they are unlikely to mind paying the extra 20% you charge.
However, if they are unregistered companies, they cannot claim this back. By the way, charities also tend not to be registered. For these clients, your prices will be 20% higher when you register.
The VAT rules for overseas customers can also be complicated. If you have many, that can also affect your decision on whether to register, depending on where your customers are and how much business you do with them. Your accountant can help with these calculations.
Another downside to VAT registration is the paperwork. Once registered, you must report to HMRC the VAT you have charged and will pay them through your VAT return. Most companies file returns quarterly.
You must also add VAT to all your invoices, keep careful records, and calculate the figures for each period. The VAT rules are complicated and returns require several calculations, so filing returns can take time. If you make a mistake, you will not be the first. However, if the mistake is in HMRC’s favour, you can claim it back.
Remember, this is not your money and you will have to pay it over to HMRC, usually quarterly. So, you must also be disciplined in ringfencing the amount you have to pay over and never spend it.
You must cancel your registration, within 30 days, if you are no longer eligible to be VAT registered - for example, if you stop trading or you join a VAT group.
You can also cancel your registration if your VAT taxable turnover falls below the deregistration threshold of £83,000.
Registered businesses with a turnover above the £85,000 threshold must submit their VAT returns using Making Tax Digital (MTD) compliant software. So make sure you choose good software that will help make this task easier.
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