When do I need to register for VAT?
If your turnover (total sales) in the previous 12 months exceeds £82,000 then you MUST register for VAT. Failure to do so can result in penalties.
The £82,000 is set on a rolling 12 months, not a calendar year.
How does it work?
When you are registered you have to add VAT to all of your sales, which is usually 20% unless your industry has special rules.
This additional charge is not your income but is collected on behalf of HM Revenue and Customs – you are effectively an unpaid tax collector!
The flip side is that when you buy anything from someone who is VAT registered, you can reclaim the VAT element back. You must have a receipt to do this.
Should I register or not?
If you mainly sell to non-VAT registered businesses/people then it wouldn’t make sense to register for VAT if you are under the £82,000 threshold. If you did, it would make your goods/services more expensive to your customers, who wouldn’t be able to recover the VAT and could cost business.
If VAT registered businesses/people are the majority of your customers, then it would make sense to voluntarily register as they can reclaim the VAT which you charge. Plus you can also reclaim the VAT on expenses, increasing your profit.
Different VAT schemes available
There are a number of VAT schemes available.
One to be considered if your expenses are low in comparison to your sales is the Flat Rate Scheme. There could be a much lower rate (than 20% standard rate) which HMRC set for your industry. Under this scheme you cannot claim back any VAT on your purchases but overall this could be beneficial.
Another one would be cash accounting. If you make sales on credit you will only need to pay the VAT when you receive payment. However, you’ll only be able to reclaim the VAT when you pay your suppliers.
We’ve tried above to give you a very brief overview of VAT and whether you should be registered or not. Unfortunately, it’s a very complicated area of tax and it’s impossible to give a better guide in a single web page. If you have any questions, contact us and we’ll do our best to help you!