Before you read on, please note that if your business’s turnover (sales) in the last 12 months was more than £82,000, then you have a legal obligation to register your business for VAT. You can register online here.
If your business’s turnover is less than this threshold, the situation is not as clear cut and so you have to weigh up the pros and cons for your individual business depending on what products and services you offer.
But let’s start at the beginning…
What is VAT?
VAT (Value Added Tax) is a tax charged on goods and services. In the UK the standard rate is 20%, however there are some exceptions, for example:
- reduced rate: some goods and services such as children’s car seats
- zero-rated: goods such as children’s clothes and books, most food, and public transport
- exempt: items such as financial services and postage stamps
- outside the scope: wages, MOT tests, and education amongst other items
Read the full list here.
As a VAT-registered business you keep a record of all the VAT you have charged your customers and the VAT you have suffered when paying suppliers and pay over to HMRC the difference, or even receive a refund if the supplier VAT is greater than the customer VAT.
Whether you choose to register for VAT depends on the industry you’re in and whether it makes sense for you.
If your business mainly sells VAT-exempt products or services, you may be prohibited from registering for VAT.
So should you register?
Advantages of registering for VAT
- If your customers are mostly VAT-registered businesses, they can recover any VAT you charge
- Similarly, you can recover VAT on any goods or services your business buys
- It makes your business look good. If you are not VAT registered, people will know that your business’s turnover is less than £82,000 per year — which you might not want people to know
- Some companies will only do business with VAT-registered suppliers so you could register to be on the safe side
Disadvantages of registering for VAT
- If your customers are the general public, then they cannot recover the VAT you charge and so are paying a higher price than they would be if your business was not registered
- You could alternatively absorb the cost yourself but this will affect the profits you make
- If you don’t register for VAT, you save yourself time in not needing more complex books and will not need to complete a quarterly VAT return.
Hopefully that will have helped you decide whether VAT registration is for you or not.
But that’s not the end of the decision-making…
Now you need to decide what VAT scheme you want to put your business on.
- Flat Rate Scheme: As described above, in standard VAT you record customer and supplier VAT and pay over the difference. With the flat rate scheme, you pay a fixed % to HMRC based on your gross turnover (ie the VAT inclusive sales) and, with one exception, do not reclaim VAT on expenditure. Your current VAT exclusive turnover must be less that £150,000 to enrol in the flat rate scheme.
- VAT Annual Accounting Scheme: usually VAT-registered businesses submit VAT returns four times a year. With the annual accounting scheme, a business make payments throughout the year based on the last submitted return. You then pay the difference at the end of the tax year, or apply for a refund if you have overpaid. Your turnover must be less than £1.35 million to join this scheme.
- VAT Cash Accounting Scheme: usually, a business pays and claims VAT on sales and purchases invoices sent and received. With the cash accounting scheme, VAT is only paid or claimed when your customers pay you, or you pay your suppliers. Again, the maximum turnover to be eligible for this scheme is £1.35 million.
- VAT Margin Scheme: you can choose this scheme if you sell second-hand goods, works of art, antiques, or collectors’ items, and you will pay VAT on the difference between what you bought this item for and what you sold it for at a special VAT rate of 16.67%.
- VAT Retail Schemes: VAT retail schemes can make calculating VAT simpler for retailers. Instead of calculating VAT on each sale you make, you do it once with each VAT return based on total sales.
We hope this has helped you make an informed decision for your business. For a more indepth view of VAT speak to an accountant. If you don’t have one, you can search through this handy directory or view the following resources to help you with all things VAT-related:
Government and HMRC contacts and information:
EU VAT MOSS: recent changes mean that the way VAT is charged within the EU on “digital services” has changed. These articles explain more:
Introduction to business tax in general:
- For an overview of all of the different types of VAT you should consider as a business, read our article here.
Tax tips for Clear Books customers: if you’re a Clear Books customer and would like to know how to complete your VAT returns in the system, read our help guides:
Disclaimer: The above rates and rules were correct at the time of writing. Always check on the current situation and take advice before deciding on VAT registration.