For many business owners, issues like VAT registration don’t get the pre thought and planning they need, there is quite clear guidance about when you MUST register, but often less thought goes into when it might be beneficial for you to register.
When must you register for VAT
Broadly speaking (and there are a few exceptions when it comes to VAT), you must register for VAT if
~ your trade is of VAT taxable goods and services
~ your UK sales within the last 12 months are more than £81,000. (This is not measured in accounting years or tax years but is just a rolling 12 month calculation.)
~ you expect your UK sales to go over £81,000 in the next 30 days alone.
You can do a voluntary VAT registration for your business at any lower level of turnover if you wish. So, why might you be tempted before it’s absolutely necessary?
Pros and cons of VAT registration
- Having VAT registration can add some kudos to your company’s image
- There is the benefit of claiming the VAT back on purchases
- If your company is growing fast and you know that you will reach the threshold in the foreseeable future, register now so that both you and your customers can get used to the pricing implications whilst the number of affected parties is still easy for you to manage.
- If managed well, it can help your short term cash flow.
- If your customers are not VAT registered then they will not be able to claim back the VAT that you will charge them and your prices may therefore seem expensive to them. To mitigate this, you could reduce your net price a little so that the price you charge does not increase too much and price you out of the market but this could (depending on your purchases) decrease your profits.
- Administration costs. There are several ways of operating VAT schemes but even the way designed to involve the least amount of extra work will take some time to administer each quarter whether your do it yourself or your accountant does it. Some online accounts packages will do a lot of the work for you these days but it is a brave person who just presses the ‘send’ button without checking the figures, at least for reasonableness, if not in detail.
- It does make cash flow very ‘lumpy’ and this needs to be planned for and managed.
There are two main schemes:
- Actual. You track the VAT on sales and deduct from that the VAT on purchases and pay the difference to HMRC each quarter.
- Flat rate. There is a table of rates that are set according to your industry. At the end of each quarter just add up the gross value of all your sales, multiply the total by the set rate and pay that amount to HMRC.
- Coaching/Training will class as “Business services that are not listed elsewhere” which has been allocated a rate of 12%.
- The theory is most easily explained with an example. If your net sales price is £100 then the gross sales price is £120 i.e. you have charged 20% VAT to your customer, which, in this example is £20. The VAT that you pay HMRC on this sale is £120 x 12% (if that is the correct rate for your industry) = £14.40. This means that you have collected £5.60 more VAT from your customer than you have paid to HMRC and this amount is assumed to be equivalent to the VAT you have spent on purchases.
- There are special rules for the purchase of capital equipment.
- Both schemes have the options to either work from invoices (i.e. VAT is calculated based on the invoice dates and values) or from cash (i.e. VAT is calculated based on the cash movements). Very often, the cash option is the best for small businesses.
Can you benefit from being VAT registered
Yes. If you choose the flat rate scheme and the fixed percentage is lower than the actual VAT you are incurring on purchases then you can make a profit on your VAT registration. (Using the above example, if your company incurs less than £5.60 of VAT for every £100 of net sales per month then all things being equal, it would be profitable to register.)
As an extra benefit, if you opt for the flat rate scheme when you first register, you get an extra 1% discount for the first year. (This would make your £5.60 into £6.80 per £100 of next sales for a year.)
Please note that I have simplified the detail in order to convey the general idea. Please take advice or find out more detail before taking action.
Rebecca Wilber specialises in working with small to medium sized owner managed businesses, including our own. She has put together a series of articles to explore some of the decisions we have to make to concerning tax.
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For further details or assistance in any matter regarding tax for owner-managed businesses, get in touch Rebecca Wilber.