Many clients ask me whether they should register for VAT. The answer is you must register for VAT with HM Revenue & Customs (HMRC) if your business’ VAT taxable turnover is more than £81,000. However, you can also register voluntarily if it’s below this. The question is WHY?!
Well there are certainly reasons why you may not want to register for VAT!
Registering for VAT comes with a lot of responsibilities. Once you have registered, you need to:
- charge the correct amount of VAT. This can get complicated as it can vary depending what is being sold and where!
- make sure you pay HMRC any VAT that is due
- submit VAT Returns on time
- maintain VAT records and a VAT account
So, why would you contemplate VAT registration if you are below (and unlikely to exceed) the threshold? Well it's worth considering if...
YOU WANT TO LOOK LIKE A BIG BUSINESS. Being registered for VAT can imply that you are larger than you are (as most businesses only register when they are going to hit sales of £81K). This can be helpful when selling to clients that prefer to buy from the big boys (or girls)! However, being VAT registered means that you often have to add 20% onto your sales prices, which can make you less competitive for consumers that cannot reclaim the VAT.
YOU SELL TO OTHER VAT REGISTERED BUSINESSES. If most of your customers are other VAT registered businesses (which includes the majority of medium and large businesses) they can reclaim the VAT that you charge. Therefore, they don't care if they have to pay VAT, as they can just claim it back.
YOU HAVE A LOT OF EXPENSES. If you are registered for VAT, you can claim back all the VAT that you pay on the costs of running your business. Therefore, it can make a big difference if you have high running costs!