VAT – To Register or Not to Register?...

The Pros and Cons of VAT Registration

Clients often ask me whether they should register for VAT or not and what the upsides and pitfalls are of registering. So I thought I’d provide some pros and cons and outline the defaults!

Aside from VAT being an option you should first understand that there is a VAT registration threshold. This is a figure whereby you must register for VAT if your VATable turnover exceeds it. VATable turnover is turnover value of goods which attract the reduced rate (5%) or standard rate (20%) of VAT. The threshold for 2013 is £79,000 of VATable turnover. The threshold is reviewed annually and it is down to you to ensure you register if you exceed the threshold. So before you read on the simple question is, are you over the threshold currently or likely to exceed it in the coming months? If so you should register.

If the threshold does not apply there are a few other simple questions to ask yourself:

  1. Are the majority of your clients/customers VAT registered? – If so they may expect you to be VAT registered
  2. Are your main/largest suppliers VAT registered? – If they are and you are not, you will have to absorb the gross cost including VAT on anything you purchase from them – squeezing your margins
  3. Are the products/services you provide VATable? – If they are not then 1 and 2 above may not matter
  4. Are your clients bigger than you? – If so, being VAT registered gives them the impression you are maybe bigger than you are – this is sometimes an issue for bigger business as they perceive security in size

Equally though, becoming VAT registered does have implications for you:

  • Quarterly/Annual returns – You are required to submit regular VAT returns which is another accounting/admin task for the business (…or your local bookkeeper!)
  • Cashflow – You have to pay your VAT return (the difference between purchases and sales) on a quarterly basis which is normally a significant chunk of cash to have to find, over and above other expenses. You can help to manage this with cash accounting but you still have to make the payments on given dates and face penalty if missed.
  • VAT inspections – HMRC are very strict on VAT accounting and so you have to be very disciplined to ensure your accounting is correct and you comply with the rules. HMRC may request to inspect your VAT and in recent years have run specific campaigns just around this
  • Managing Changes – In recent years the VAT rate has changed on a temporary basis and then the long term standard rate. This has had a massive implication on the administrative side of business including printing new stationery, fulfilling orders at multiple VAT rates, multi rate VAT returns etc. so you need to ensure your processes are robust and able to cope with changes. VAT is one of the easiest major taxes for the treasury to change and it is currently a pawn in the political game leading up to the 2015 elections so more changes could be just around the corner.

Finally, you need to be aware that there are various VAT schemes and you don’t have to go down the traditional VAT route. If you are a service based business with few purchases, then the Flat rate scheme may be the best option for you. Equally, cash accounting, retail specific and margin based schemes also exist so it is worth doing some homework before you go ahead.

For more details on the current VAT threshold and rates visit the HMRC website http://www.hmrc.gov.uk/vat/forms-rates/rates/rates-thresholds.htm#2

For more details on the various VAT schemes available visit the HMRC website http://www.hmrc.gov.uk/vat/start/schemes/basics.htm

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