We have created this basic summary to help sole traders and SMEs decide on whether to voluntarily register for VAT, and the requirements of when to register, and what this means for your accounts.
When to register for VAT:
- If your turnover of taxable supplies exceeds £85,000 or if you know you will exceed this amount, then you must register
- This threshold applies to turnover rather than profit
- Taxable supplies includes any product or service which is liable for VAT, at any rate, including 0%
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- If you import goods to the UK, which come to over £85,000 you must register
What are the advantages to voluntary VAT registration?
- Reclaiming VAT - although you would be required to charge VAT on your goods and services once you have registered (output tax), you can also reclaim VAT that you are charged by other businesses (input tax). As long as your input tax exceeds your output tax in a given period, you will be able to claim the difference from the HMRC
- Appeal to larger companies - some companies decide to register for VAT before hitting the £85,000 turnover so they can appear larger to other companies and be able to tender to larger clients. This can help you increase your standing to potential clients.
- No difficult price changes conversations with clients - When you do grow your company and have to register for VAT based on the turnover, this can be a difficult conversation to have with clients, as it means your prices have to go up by that percentage (currently 20%). If your goal is to grow your business to this stage and beyond, then we recommend avoiding that potential difficulty, by registering at the beginning of your business life, so your clients are already in line with your pricing.
What are the disadvantages of VAT registration?
While there can be advantages to claiming back VAT on expenses, there are a number of factors that should be brought to your attention prior to registering for VAT.
- Additional VAT taxes to pay each quarter - once you have registered for VAT you will be required to submit quarterly VAT returns and pay the difference to VAT if your output tax exceeds your input tax (if your charged goods and services are higher than the VAT you pay to your suppliers)
- Increased paperwork and accountancy costs - as you now have to submit these quarterly returns, your accountant will need to up the service they provide to you, as well as needing you to spend additional time to check and review your transactions. This is why we always recommend using an efficient software system, such as Xero, which will help ease the admin burden. There are also significant penalties for late filing and late payment, so you must file on time and pay HMRC on time.
- Using new technology - with the introduction of Making Tax Digital, companies which are VAT registered are the first to be required to be fully digital from April 2019. This means, if you have not already got an accountant or a system in place which uses digital technology, you will need to train in these swiftly to be in accordance with the regulations.
- Increased costs to your clients - if you become VAT registered you may have to increase your prices to your customers to cover these additional costs. If you keep your prices the same, then your profit will reduce for each invoice you send.
You need to consider whether the advantages of being able to claim back the VAT you spend with suppliers outway the additional costs of accounting and time constraints set upon you for the filing of your returns.
Companies may wish to register for VAT because:
- They regularly purchase materials which are classified as direct expenses, which are charged with VAT
- If you purchase materials in the EU, you may have to pay additional VAT on top of the price, but if you are registered in the UK you will not have to pay this additional VAT.
Deregistration for companies:
- You can deregister your business if your turnover goes below £83,000 over 12 months.
- If your company stops making taxable supplies, or if it becomes a part of a group.
- If the legal structure changes or if the business is sold
If you registered voluntarily, and your business has not reached this threshold, HMRC should have no objection to your deregistration, however, if you have previously exceeded the threshold you may come into difficulties persuading HMRC that your turnover will fall within the coming years.
For information on how to ensure you are getting the right help making decisions such as deciding whether to register for VAT, please contact Elena Meskhi & Co. on +44 (0)2032878706.
We would not claim that the above list is exhaustive or necessarily applicable to all sole traders and companies. Individual circumstances may require further discussion before deciding whether to register for VAT. With the changes soon coming to the UK with Brexit, this may cause implications or unexpected changes to occur. Please ensure you speak to a tax expert, such as our team at Elena Meskhi and Co, to ensure you are getting the right support for your business.
