If every time I was asked business advice on this question, I would be sitting on a beach somewhere right now, instead of writing this blog.
Not all businesses need to be VAT registered. What type of set-up you choose is up to you, in most instances. Here are some facts and guidance to help you make the right decision.
First it's important to know that there is a compulsory threshold of £85,000, and if a business’ turnover in the previous 12 months go above this, then they have to register for VAT, and if they don’t there could be fines to pay. Your accountant will be able to keep an eye on this as it works on a rolling basis for any 12 month period, not by tax or business year.
What are the benefits to being VAT registered?
As a new start-up there is no need to register for VAT straight away but you may choose to for the following two reasons:
Financially better off
VAT is a tax that you collect for the taxman, so if you sell a product at £1,000, that becomes £1,200 and the £200 goes to HMRC. If you buy a product which has VAT on top you can also claim this back though, so if you buy an item for £100 with £20 VAT on top, the money you pay HMRC becomes £180, making you £20 richer.
Depending on what your industry is, it may make financial sense to become VAT registered.
If you haven’t reached the turnover threshold, becoming VAT registered may still be in your interest as it will make you look bigger than you are. Again depending on your target market and the businesses you are trying to connect with, you may feel this will help your overall marketing efforts.
What are the downsides to becoming VAT registered?
There are a few reasons why you may not feel it’s a good idea to voluntarily register, when you are still under the threshold of £83,000.
The overall price increase of 20% on your goods or services, could be off-putting if you are trading with businesses who are not VAT registered. If you trade with many businesses like this then it could be problematic. As a new business when researching your target market make sure you have a clear idea of whether this likely to be the case. Of course if you will predominantly trade with businesses that are VAT registered, they can claim it back so it isn’t a problem.
Many businesses say that the VAT paperwork is a lot, so depending on what your accounting team looks like this could be burdensome. However you may find an accountant who can take it on, or has the software that makes it easier to manage, but it’s worth thinking about this when starting-up as there will be many other administrative processes that take up more time than you think.
Businesses that cross the VAT threshold will be required to comply with ‘Making Tax Digital’ for their VAT affairs from April 2019. Read more about making tax digital.
What VAT schemes types are there?
There are different types of VAT schemes. This could influence whether this is right for you or not.
Standard (Accrual) Scheme
This means you pay and reclaim the VAT at the end of the quarter in which the invoices are dated. This could be problematic if you don’t get paid or purchase the items in the quarter you are invoiced.
Cash Accounting Scheme
With cash accounting, you account for VAT on the date you’re paid instead of the date you send the invoice. This can be helpful for those companies that have slow payers, since you don't have to pay VAT before you’ve been paid.
Flat Rate Scheme
You pay a flat rate regardless of how much you reclaim, not only is this less paperwork, but for some lines of work, this can be a benefit. The percentage you say depends on your industry. Only smaller businesses, with annual turnover up to £150,000, can use this VAT scheme. Check with HMRC to find out whether yours is eligible.
You have to weigh up whether it’s worthwhile when starting out as there could be some benefits to doing so, but equally it could be way more hassle and costly than it’s worth. The correct business advice on this is speak to a business consultant or your accountant.
The business advisors at RBSS Consulting in Romford are up to speed with all VAT matters and can help explain the different options to help you decide which one is right for you. Call us on 0333 355 1696 today.