We’re used to paying VAT as consumers almost every time we buy something. It’s usually 20%, although some items have a reduced rate and some are zero-rated.

Some businesses MUST register for VAT, but many have a choice. If you’re reading this, I’m going to assume you’re already familiar with mandatory registration and the £90,000 threshold. (If not – search for our “VAT Basics” blog for more info).

If you register your business for VAT you must add the tax at the appropriate rate to your selling prices. You then hand that additional amount to the government. Congratulations! You’re now an unpaid tax collector.

You also have to keep meticulous records and submit monthly or quarterly VAT returns.

The upside is that you can reclaim the VAT you pay to your suppliers. These reclaims could be significant. If you trade below a defined earnings threshold it’s up to you whether you register.

This guide may help you make that decision. But it’s only a guide, and we’d recommend you speak to a Chartered Accountant before you take the leap. Well, we would, wouldn’t we!

VAT and Pricing

Once registered, you’ll add 20% VAT to your invoices. Your customer will pay you (say) £120 instead of £100. After paying the VAT to HMRC, you’re left with the same £100.

If your customers are VAT-registered businesses they’ll reclaim the 20% on their own VAT return. A little
more cash moves around, but no overall change in your prices.

If your customers are individuals or non-VAT-registered businesses, they won’t be able to claim the VAT back. So you just became 20% more expensive!

Who would choose to register for VAT?

Answer: any business that makes significant purchases with VAT added. Your Chartered Accountant can prepare some figures to show you the effect of being VAT registered before you take the leap.

True story: Blue Penguin registered for VAT long before we hit the threshold. Most of our customers are businesses, so it made no difference to them. And it allowed us to reclaim VAT from day one.

Points to consider:
• Are most of your customers VAT registered, and unaffected by your ‘plus VAT’ prices?
• How much VAT are you paying on purchases – does the reclaimable amount warrant the additional admin and compliance risk?

Each business is different. And PENALTIES CAN BE ONEROUS, and wipe out any VAT savings!!

Administration

All VAT-related transactions must be recorded and reported quarterly and must be done via approved commercial software, such as Quickbooks or Xero.

Despite the flashy adverts about how online accounting systems handle all the record keeping for you and make it a breeze…rubbish in = rubbish out. If you do your own bookkeeping we would advise you to have the figures reviewed each quarter before submission, so any errors can be corrected.

One client came to us because he had been using Xero by himself for about a year but hadn’t configured it correctly – he found out the hard way when cumulative penalties of about £1,600 landed on the doorstep!!!

Oh, and if you’re still using a spreadsheet, we need to talk (and not just about VAT).

Flat Rate VAT Scheme

Another consideration will be whether or not to apply for the Flat Rate VAT Scheme. Under the scheme, you pay a fixed rate of VAT to HMRC based on your business type. The rate is lower than the 20% you add to your invoices (the exact rate depends on that type of business you’re in) and you get to pocket the difference.

Wow! That sounds amazing, right? But hold on – you cannot then reclaim VAT on most of your purchases. The calculations to decide whether or not the Flat Rate Scheme is beneficial can become quite intricate – definitely one for professional advice!

For a more detailed explanation of how the Flate Rate Scheme works, search our “FRS VAT” blog

The Cost of Getting This Right

This blog is a general guide to the main things you need to consider when deciding whether to register for VAT. It’s not exhaustive, and everyone’s circumstances are different.

You don’t need an accountant to register for VAT. And you don’t need a solicitor to buy a house. But why would you go it alone when so much is at stake?

Last year we reviewed the VAT position of a new client in the hospitality sector. A simple error on their till system meant they weren’t charging VAT properly on all of their sales, to the tune of £40,000 over the last few years. Their previous accountant had failed to pick this up; I believe some choice words were had!

Our fee for a consultation to review the pros and cons for YOUR business of VAT registration is £140 plus VAT, with a similar fee for the registration if that is the right thing for your business.

If you’d like to have a conversation in more detail, you can “Book a call” using the button at the bottom.

It’s fair to say that our costs in Getting This Right are significantly lower than the costs in tax and penalties of Getting This Wrong