Should I register for VAT?

Introduction

VAT (Value Added Tax) is a tax that is added to the price charged to customers or clients for goods and services sold.

Example: Sale with and without VAT being charged

If you're a small business owner you may have wondered whether you should register for VAT. Businesses are required to register for VAT if their annual turnover exceeds a certain threshold. Some business may also benefit from choosing to be VAT registered, even if they're not required to.

In this guide we'll discuss the different types of registration and the tests that determine whether you are legally required to register. We'll also explore the pros and cons of voluntary registration.

Types of registration

There are two types of VAT registration, compulsory and voluntary.

The type of registration most business owners have heard of is compulsory registration. Compulsory registration is where you legally have to register for VAT because your annual turnover has exceeded (or will shortly exceed) the registration threshold.

Voluntary registration on the other-hand is when you register without any legal requirement to do so. We discuss why you might do this later on.

Compulsory registration

To determine whether you must legally register for VAT you need to keep track of your annual turnover. Turnover is the total amount of sales or services you have charged for, before any expenses have been deducted.

As a small business owner you should frequently monitor your annual turnover to decide if you are required to register for VAT. We typically recommend you monitor this on at least a monthly basis.

Failing to submit your compulsory registration when required can lead to penalties and interest, in addition to a back-dated VAT charge on all turnover from the date you should have been registered. Needless to say, not registering for VAT when you are supposed to can be very costly.

Historic turnover test

Most businesses that register for VAT do so because they meet this test.

To carry out this test you need to calculate your turnover for the last 12 months. If your turnover in the last 12 months is more than £85,000, you must register for VAT.

If your annual turnover has surpassed the £85,000 threshold, you must register and start charging VAT one month and one day after the 12 period where you exceeded the threshold.

Example

Penny owns a business called Fantastic Pens Ltd. Penny checks the turnover of Fantastic Pens Ltd between 01 July 2022 to 30 June 2023 on 15 July 2023. During those 12 months the turnover was £87,000. Penny must register and start charging VAT on all sales from 01 August 2022.

Example

Simon owns a business called Super Slick Services Ltd (SSL). Simon checks the turnover of SSL between 01 March 2022 to 28 February 2023 on 12 March 2023. During those 12 months the turnover was £76,000. As SSL's turnover did not exceed £85,000 the business does not need to register for VAT, however Simon must carry out this test again next month.

On 24 April 2023 Simon checks the turnover of SSL between 01 April 2022 to 31 March 2023. During those 12 months the turnover was £89,000. Simon must register and start charging VAT on all sales from 01 May 2023.

Future turnover test

This test is far less common than the historic test, however you must also consider it when you review your turnover. This test looks at your expected turnover in the next 30 days in isolation. To be absolutely clear, historic turnover is ignored for the purpose of this test.

The most common scenario where this test applies is when a business has won a new contract worth more than £85,000 in the next 30 days.

If you expect your turnover within the next 30 days alone to exceed £85,000, you must register for VAT from the date you first expected this to happen.

Example

Joe owns a business called Top Tech Consultancy Ltd (TTC). TTC usually has a monthly turnover of £4,000 and has therefore never been registered for VAT. However TTC has been awarded a contract worth £110,000 for services to be provided within 1 month, starting 01 August 2023. Joe must register and start charging VAT on all sales from 01 August 2023.

Other tests

There are other tests to carry out when determining whether you must legally register for VAT. Some of these tests apply to businesses who sell digital services to customers in the EU and businesses that purchase goods from the EU.

These tests are outside the scope of this guide but if you would like advice on these tests, please get in touch.

Voluntary registration

Voluntary registration is where there is no legal requirement to register for VAT but you choose to do so anyway. Depending on a number of factors such as your:

• Industry or profession
• Customers
• Suppliers
• Goals for your business

it may be beneficial to register for VAT for a number of reasons. Registering for VAT can also have numerous downsides so it's important to assess the impact of going VAT registered before fully committing. This is something an accountant can help you with.

We will explore some of the pros and cons for voluntary registration below.

Pros

Reputation

Having a VAT number and charging VAT may make your business appear bigger and more established.

Reclaim VAT on costs

If you purchase goods or services you may be able to reclaim the VAT element of the cost.

An example would be if you were to purchase a laptop that costs £1,200. The price may include £200 VAT which you would be able to reclaim from HMRC, bringing your cost for this purchase down to £1,000. Of course, VAT has to be charged by your supplier in order for you to claim back the VAT.

Charging VAT to VAT registered customers

If your customers are VAT registered businesses they may be able to reclaim the VAT you charge them, meaning you can add VAT to your existing sale price at no extra cost to your customer.

When taking this into account with the reclaim VAT on costs section above, you actually improve your profit margin on every sale. Your sale price is the same but your purchase price is now reduced.

Example

Jeff owns a business called Fabulous Furniture. Fabulous Furniture manufactures wooden furniture for a local trade outlet who is VAT registered. Fabulous Furniture's wood supplier is also VAT registered.

Jeff makes a sale of £2,000 to the trade outlet. The wood cost to Jeff for this sale is £600. The profit on this sale is £1,400.

If Fabulous Furniture was VAT registered Jeff would charge his customer £2,000 plus VAT. Jeff would reclaim £100 VAT on the wood cost, making the net cost of the wood £500.

By being VAT registered Jeff would have made £1,500 profit on this sale instead of £1,400, £100 more.

Note: Even though Jeff's customer is paying an extra £400, the cost to them is still £2,000 as they can reclaim the £400 from HMRC.

Zero-rated sales

Not all sales of goods and services attract VAT at 20%. Some goods and services attract VAT at 0%, also known as zero-rated supplies.

Note that zero-rated supplies are different to exempt supplies. Whilst both types of supplies attract no VAT, there is a big difference between the two. With zero-rated supplies you can reclaim the VAT on costs whereas if you only make exempt supplies you can't. If you make zero-rated supplies and you register for VAT you should receive a VAT repayment from HMRC on a regular basis.

Example

Jill's Bookstore sells only zero-rated books. In the last month Jill's Bookstore had VATable expenses of £4,800. These costs are made up of advertising, telephone/internet, accounting fees and other overheads. If Jill's Bookstore is VAT registered it can reclaim £800 VAT from HMRC bringing the cost of these expenses to £4,000. Note - Jill's Bookstore does not have to account for VAT on its sales.

Reclaim VAT on pre-registration fees

Once you're registered for VAT you have to charge VAT on your sales from the date of registration, and you will reclaim VAT on your costs from the same date.

What is less known is that you can also reclaim VAT on costs incurred before the date of registration. You can reclaim VAT on some services received up to 6 months before the date of registration and you can reclaim VAT on some goods purchased up to 4 years before the date of registration. Needless to say this can result in a large VAT repayment in your first VAT return period.

Cons

Charging VAT to non-VAT registered customers

If your customers are private individuals or non-VAT registered businesses, they won't be able to reclaim VAT charged to them.

This means that any VAT you add on top of your existing price will be an additional cost to the customer. In practice this usually means you have to charge the customer the same as before in order to remain competitive. This results in you bearing the VAT cost and can have a major impact on your business profits.

Example

Betty's Beauty is a nail and beauty salon for the general public. The average price for a treatment is £20. Betty's Beauty product cost for this treatment is £6. Betty's Beauty profit on this treatment is £14.

If Betty's Beauty registered for VAT, it would be unable to add VAT to the sale price as they would no longer be competitive to the general public. Therefore the sales price remains at £20. After taking into account the VAT, the net sale price that Betty's Beauty receives is £16.67.

Betty's Beauty can reclaim the VAT on the product cost making the net cost £5. By being VAT registered Betty's Beauty's profit on this treatment is now £11.67 instead of £14, £2.33 less.

Increased admin

By being VAT registered you will have more responsibilities when it comes to preparing paperwork. You will have to:

• Provide a VAT invoice or receipt for every sale
• Ensure you have a valid VAT invoice or receipt for each purchase
• Keep digital accounting records of your business transactions
• Submit regular VAT returns
• Pay VAT by the due date in order to avoid penalties and interest

All of the above comes with increased costs and time spent.

At TaxBoxx we handle as much of this as possible for you. If you are already VAT registered or are deciding whether to register, feel free to get in touch to see how we can help.

Sole traders and VAT

If you operate as a sole trader and decide to register for VAT it is important to note that it is you as a person that will be registered for VAT, not your business.

This means if you have multiple businesses or even other income streams such as a furnished holiday let, VAT will also need to be charged on any services or sales in these ventures. This can catch even tax savvy business owners out, so for this reason we generally advise to register a limited company if you intend to register for VAT.

Exempt sales

Not all goods and services attract VAT. Some supplies such as postage are exempt from VAT. If your turnover includes exempt services or goods you exclude these sales for the purpose of determining whether you should compulsorily register for VAT.

If your sales are solely exempt from VAT you are also unable to voluntary register for VAT.

If you have a mix of VATable and VAT exempt sales you may register for VAT and reclaim VAT on your costs under the partial exemption rules. The partial exemption rules are outside the scope of this guide.