Value Added Tax (VAT) registration, doing it sooner and being an unpaid tax collector seems crazy.
It looks complicated, not to mention time-consuming. However, with the right help and guidance, VAT registration, operating it and invoicing are straight-forward and easy to navigate.
Your business must register for VAT if
- Your taxable supplies, including zero-rates sales, have gone over the registration limit in the past 12 months.
- There are reasonable grounds for believing that your taxable supplies in the next 30 days will go over the registration threshold; or
- The business takes over another business as a going concern, to which the two bullet points above apply
Your business can register for VAT voluntarily if its turnover is below the £85,000 threshold. It saves tax by doing so, particularly if its main clients or customers are also VAT registered.
Value Added Tax Example
Sarah is a non-VAT registered carpenter and a basic rate taxpayer. She buys a new saw to use in her business, which cost £100 plus VAT, so she pays a total of £120 (£100 plus VAT at 20%).
Sarah can offset this costs against her business profits for tax purposes. If she is a basic rate (20%) taxpayer, she will save tax of £24 (20% of £120). In real terms the saw actually costs her £96. There will also be a saving in Class 4 NIC
However, if the business is VAT-registered, the £20 VAT paid on the item can be reclaimed and £100 is set against business profits for income tax. The tax reduction is therefore £20 (20% of £100) and the saw actually costs him £80 – saving £16 by being registered for VAT.
Is non-registration preferable?
VAT-registered businesses supplying goods and services to private individuals or non VAT registered businesses will have to charge an additional 20% on every bill issued.
A business not wanting to register for VAT, may be able to stay below the annual VAT registration threshold. You can do this by supplying labour-only services, customers will need buy any goods needed themselves.
Bob is a non-VAT registered plumber, but his turnover is getting close to the VAT registration threshold. Bob asks his customers to buy materials for a job directly from a DIY shop. His customers will have to pay the VAT on these items, but they won’t pay VAT on Bob’s invoice for labour services. This will also have the additional advantage of reducing Bob’s annual turnover for VAT registration purposes.
There are several positive reasons for voluntary registration, including:
- Gives an impression that the business is bigger than it actually is
- Able to claim input Value Added Tax
- Avoids any future problems when limits exceeded
- Imposes discipline on business to keep accurate records.
- An increase in admin work
- The VAT added to your prices will be an extra cost for individuals, and non VAT registered businesses
You may be able to claim back Pre-registration input VAT. This is summarised below
Goods: You can claim back Value Added Tax on goods purchased from last 4 years from the date of
registration. You must still have those goods on the date of VAT registration.
Services: You can claim Value Added Tax on costs incurred 6 months pre-registration date. Examples include accounting, advertising and legal costs incurred last
From 1 April 2019, VAT-registered businesses over the registration threshold must comply with Making Tax Digital. The VAT Rules will not change under MTD, it is how the information is sent to HMRC that will change.
In conclusion, consider registering for VAT early.