You’re a new small business, one thing you’ll want to know the answer to is “should I register for VAT”?
Many people are a obliged to charge VAT once they hit £85,000 but many people opt to voluntarily register for VAT. We see a lot of small businesses getting confused on when they should register for VAT. So when should you registe
VAT is a tax on the end consumer . The standard UK rate of VAT is 20 %. This applies to the majority of goods and services. However, there are two other rates of VAT: a rate of 5% per cent applies to items including children’s car seats and home energy, and the 0% rate applies to essentials like food and children’s clothes.
Do I have to register for VAT?
So the rules are, if over a course of 12 months trading your “taxable supplies” exceed the VAT threshold then you have to register for VAT.
The VAT registration threshold is £85,000 in 2020-2021 tax year.
- Find out more about who needs to register for Making Tax Digital (MTD)
- Find out more about what is VAT Moss?
- Find out more about how spending money on Facebook can force you into registering for VAT
What are taxable supplies
Taxable supplies are anything which would be subject to VAT, this includes any product or service that is liable for VAT including items charged at 0%. The only items you would exclude would be those which are VAT exempt. You can find the list below:
- insurance, finance and credit
- education and training
- fundraising events by charities
- subscriptions to membership organisations
- selling, leasing and letting of commercial land and buildings – this exemption can be waived
Unless you are involved in any of the above, use your turnover when determine the value of your “taxable supplies”.
Reverse Charge Ad Spend and VAT Thresholds
What is reverse charge, and how can it affect taxable supplies? Many small businesses spend a considerable amount of money with Google Ads, Twitter ads, Facebook ads and so on. However, these companies are based in Ireland. When they invoice your business, they do not charge VAT. However, they charge reverse charge, which means you need to record the transaction as if you were the both seller and buyer.
This means you have to pay no VAT but what catches businesses out is, these invoices count towards your taxable suppliers. If you spent £45,000 on Facebook ads and made £45,000 turnover, you would have to add these together to get to your taxable turnover. Here you would be £90,000 and have to register for VAT.
I am below the threshold, should I voluntarily register for VAT?
Many small businesses register for VAT below £85,000 for many reasons. However, this is a big decision and can have an enormous impact on your business if not properly thought through.
The foremost reasons to voluntarily register for VAT are:
- Reclaiming VAT. Although you will have to charge VAT on your goods and services once you are registered (known as output tax), you will also be able to reclaim VAT that you are charged by other businesses. This is known as input tax. At the start of a business when you have a lot of outgoings this may help you, for example, if you sold £2000 of goods and charged £400 of VAT but spent £10,000 on various start up items and can reclaim £2000, HMRC would then send you £1600.
- Pricing – You need to think about your pricing strategy with VAT or without, once you hit £85,000 and you haven’t already incorporated VAT in the pricing strategy then you will be hit with increased prices. If you factor it in or register straight away you need not worry about this as its clear from the start.
- Building impressions. Firms which need reputation, can register for VAT to appear larger than they are. Clients will know that there is a threshold of £85,000 so if your not registered they will know your turnover is below this. To avoid this you can register for VAT as a way of increasing your standing among competition, and in the eyes of clients. This makes your small business seem like a bigger business.
Why wouldn’t I voluntarily register for VAT?
Despite its benefits, small business being registered for VAT can have downsides. Most times these downsides make registering for VAT as a small business not worth it.
- Higher Prices. As a VAT registered small business, you must charge VAT on any relevant goods or services. You can still reclaim the VAT you pay – but when you become profitable and your output tax (the VAT you charge) exceeds your input tax (the VAT you pay), pay the difference to HMRC. This therefore makes you appear more expensive (though factor VAT in even when you are not registered. If you are not prepared for this, its another cash outflow and with poor planning this may put pressure on your cash balance.
- Increased paperwork. VAT registration also requires small businesses to complete a raft of additional paperwork. If your over £85,000 threshold you will also need to register for Making Tax Digital – this makes you use software to submit your VAT return see our guide on software. Small businesses who voluntarily register for VAT will not have to be part of the Making Tax Digital scheme. Those small businesses who have to use Making Tax Digital will normally have to file a quarterly VAT return via software, and you will have to implement VAT accounting into your existing accounting and bookkeeping system. If this is the case we recommend upgrading to cloud accounting software, it makes sense as it will not only improve Making Tax Digital Compliance, it will also improve your bookkeeping and control of the business.
Can I deregister for VAT?
Sometimes small businesses’ circumstances change and you may want to deregister for VAT. While this should be a simple process, HMRC can be difficult to convince.
Small businesses can deregister from VAT if they are below the threshold of £83,000. You can deregister your business if its turnover or taxable supplies will not exceed the threshold in the next 12 months. If you registered voluntarily and your business has not yet reached this threshold, HMRC should be happy with this. However,if your turnover has previously exceeded the threshold, HMRC may want more information on why you think it won’t exceed £85,000 next year.
Small businesses have to deregister from VAT if the business stops making taxable supplies, or if it becomes part of another VAT group.
VAT registration needs to be considered at the very start of small business. You should always think about it when pricing your items, VAT or not VAT. The prospect of increased software requirements and the potential for a hefty bill from HMRC can discourage those small businesses thinking about voluntary registration. VAT registration can still be a great financial decision. Small businesses need to make sure they properly consider the pros and cons of registering for VAT, if in any doubt seek advice from an accountant.
What is VAT MOSS?
VAT MOSS (VAT Mini One Stop Shop) is an EU scheme to ensure that VAT is paid on digital downloads such as sewing patterns or ebooks. Those who sell digital items need to register for VAT MOSS even below the £85,000 turnover – this can be a huge burden on small business. Find out what VAT Moss is here.
VAT for Amazon Sellers
Selling on Amazon is great, but there are VAT implications in the UK and EU without even knowing. Take a look at our guide on VAT for Amazon sellers to know more.