It is important to have an understanding of what Value Added Tax (VAT) is even if you don’t need to register your business. There are some situations where you may benefit from voluntary registration but this won’t be the case for everyone. You will need enough understanding to be able to determine the best thing for your own business.
The threshold that requires registration for VAT relates to turnover of your business, this is the money that you take from your customers and it is based on a 12 month, calendar basis. If you expect that your turnover will exceed the threshold then you should register for VAT. If at the outset, you aren’t sure how long it will take until you have reached the threshold then you can wait, however it is imperative that you monitor your turnover every month for the previous 12 months as going over the threshold before you have registered can be costly. This is because you will be required to account for VAT from the time you pass the threshold and if you do not charge your customers VAT at the time, you may not be able to be paid this from them at a later date which will essentially mean you will need to pay this VAT yourself. If you are using MTD software to keep your accounts and keep this up to date on an ongoing basis, then this should be simple to track but you should take advice on anything you are uncertain of.
If your business is under the threshold that requires registration for VAT and you do not expect this to be reached within a 12 months calendar period then you may chose to voluntarily register for VAT (unless all of your supplies are exempt from VAT). There are several reasons a business may chose to register voluntarily for VAT and this will be individual depending on trade, customer/client base and the brand image that is to be projected.
When deciding whether voluntary VAT registration is appropriate for your business you should firstly ensure that you understand the financial implications. Consider your customer/client base and whether these are predominantly VAT registered business or private individuals. This is relevant as VAT registered businesses will be able to reclaim any VAT that you charge so it will only affect their cashflow, a private individual will not be able to reclaim the VAT and therefore will in effect be paying an additional 20% for your products or services. Depending on your competition, your market may not stand for a 20% increase and therefore you may have to reduce your net cost in order to remain competitive and this will therefore reduce your profit. When you are registered for VAT you will be able to reclaim any VAT that you pay out on products and services, however you should bear in mind that if these are costs that you pass on to your customers, then you will also need to add VAT to what you charge them, which may include a mark up. If for example you purchase materials for £120, £100 net cost + £20 VAT and are not registered in VAT, you will pay £120 which will be your business expense, you will charge your customer £120 to recoup your outlay. If you are registered for VAT in this same scenario, you will reclaim the £20 VAT from HMRC and your £100 net cost will be your allowable business expense; you will then charge your customer £100 + VAT and pay the VAT to HMRC so either scenario, you are financially the same in the end.
Some commercial customers or clients may require that their suppliers be VAT registered due to the checks that are undertaken by HMRC as part of the application process
Some businesses may also chose to voluntarily register for VAT to portray a more professional and corporate brand image