VAT – or value added tax – is a ‘consumption tax’ that is paid on certain goods and services and ‘taxable supplies’.
Those businesses registered must legally charge an extra 20% to the cost of the product or service they are offering.
They then pay HMRC the amount charged to the customer for your product or service. This means you’re effectively acting as an unpaid tax collector!
Businesses registered for VAT can reclaim what they are charged when they buy products or services. So, there can be some advantages to being registered.
Should I register for VAT?
Not all businesses need to be registered. If your annual turnover is less than £85,000 per year you don’t need to register for VAT.
That means you can’t charge VAT to your clients or customers. But it also means you can’t reclaim anything you have been charged. Individuals cannot register for VAT, so can’t reclaim it as it is only available to businesses.
There are many advantages to being registered if your turnover is below £85,000. So, here is our guide.
Ability to reclaim
One of the best reasons for registering for VAT is that you can reclaim what you pay when your business makes purchases with it added.
It includes what stock you buy to sell to your customers or what you use as part of your service to them. This includes tools and your accountancy bill.
If you use a van or other commercial vehicle you can also reclaim the cost of running it; but not a car. You can also reclaim the cost of items such as computers that you use to help you run your business.
Being registered can make your business appear as being better established. It also looks more professional if you deal with a lot of other VAT-registered businesses.
If you’re planning to export it not only increases your credibility but business customers abroad are less likely to buy from you if you cannot produce a VAT registration number.
Also, a growing business that registers voluntarily won’t accidentally exceed the £85,000 threshold, which could end up being costly.
Why you may not want to register
While there are many advantages to being VAT registered there can be disadvantages.
For example, if you are registered you may be less competitive if you’re selling to the general public who cannot claim it back. Competitors who aren’t registered might be able to undercut you once VAT is taken into account.
You will also see an increase in the paperwork you have to deal with. You will need to prepare and submit quarterly VAT returns online. Although it’s a lot easier if you use HMRC compliant software.
Another drawback might be that if you are the sole owner of another business your VAT registration will apply to all your other taxable activities.
What should I do?
Before making a decision, it’s best to talk to an accountant or expert. We’d be happy to chat to you, so contact us if you’re uncertain. Even if you’re not in Newcastle, we deal with businesses across the North East and beyond.
Either way, don’t worry because registering for VAT doesn’t work out for you, you can always apply to deregister! But beware, your turnover must remain under £85,000 if you do.
If you do that, any VAT already reclaimed on your stock and capital items that exceed £1,000 on the day you deregister will have to be repaid.
VAT is complex, so take some expert advice before making any decisions.