To VAT or Not to VAT — The Small Business Dilemma
One of the most common question I hear from my friends who are just starting their business is ‘Gaby, should I register for VAT?’. It’s time to answer this question.
Disclaimer: The blog posts published in Easy VAT are based on my 4 years of experience as a VAT consultant. However, they are not tax advice, are not personalised to your situation, and are published for information purposes only. Before making any tax-related decisions for your business, you should speak to a qualified accountant or tax consultant who will be able to advise you. The information in this post relates to the UK.
VAT is often talked about as the easy tax. After all, it’s ‘just 20%’, right?
Well, yes and no.
Firstly, 20% is not the only rate of UK VAT.
Secondly, the rate is the smallest problem. Where, how, when and to what it applies are the real issues keeping VAT consultants in business.
Today I want to focus on whether your business should be VAT registered. This is a common dilemma for new business owners, who try to get everything set up before, or soon after, they start trading. At that point, their revenues are generally a far cry from the VAT registration threshold, but they heard that if they register, they can recover VAT on costs, and that seems tempting.
I get that.
So, let’s start with the basics.
The VAT registration threshold is currently (June 2022) £85,000, and it hasn’t changed since 2017.
What a lot of people don’t know, however, is that there are TWO ways to go over it.
- If the sum of your turnover (not profit!) for the last 12 months has exceeded £85,000. It’s a rolling 12 months, not calendar year or tax year; or
- If you have a reasonable expectation that your turnover will exceed £85,000 in the next 30 days alone. So, e.g. if you signed a big contract and will be raising an invoice for over £85,000 in the next month.
In those cases, you MUST register.
But what about when you’re far off that, and are wondering whether to register voluntarily?
I’ve divided the answer into two categories ‘Beneficial when…’ and ‘Not beneficial when…’ for those business owners that are considering registering even though they don’t have to yet.
BENEFICIAL WHEN…
- You’ve got loads of high VAT expenses (for example, you’re refurbishing your premises), and you’re expecting to hit £85,000 quickly.
In that case, you might want to register as an intending trader, and recover the VAT (as long as it relates to your future VAT-bearing supplies).
2. You will only be working B2B.
For some, being VAT registered might add legitimacy to your small business, and other businesses will generally be able to recover the VAT you charged them, so you can add the 20% on top of your current price, and they won’t mind.
3. You want to avoid missing the time when you cross over the threshold.
If you are getting close, and are not great at keeping an eye on your finances, an early registration might save you from potential future penalties.
NOT BENEFICIAL WHEN…
- You only work with individual customers.
They won’t be able to recover the VAT, and it’ll therefore be a cost to them. If you’re VAT registered, you’ll then either need to raise your prices by 20% (which your customers might not like), or sacrifice 1/6 of your current price to HMRC (which will in turn bite into your profit).
2. You can’t afford an accountant.
VAT is more complex than you think, and unless you have a solid amount of knowledge about it, I wouldn’t recommend doing your VAT returns by yourself. Also, all VAT returns now need to follow the Making Tax Digital for VAT rules, which increases the cost of filings.
3. You don’t really pay much VAT on your costs
If you’re currently not paying much VAT, the cost of preparation and filing of VAT returns on quarterly basis might exceed the benefit of recovering the VAT charged to you. Also, if you don’t incur much VAT, then the VAT charged to your customers is likely to exceed the VAT being recovered, and you’ll end up having to make a payment to HMRC.
This is just a high level overview of some of the most common advantages and disadvantages of voluntary VAT registration. Every business is different, though, so you should carefully consider what is and what isn’t going to work for you.
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