Should I register for VAT?

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A common question among small business owners is whether or not they should register for VAT and what is the Vat Threshold? We will discuss benefits and disadvantages, voluntary registration, how does Vat work and a little bit about different Vat schemes available.

VAT Registration

VAT registration is compulsory if your annual turnover is above the registration threshold (from 1 April 2015 this is £82,000).

If the turnover of a business exceeds the VAT exemption limit, the business must register for VAT and charge VAT on its sales.

This is the basic situation when your business needs to register for Vat, however there are other scenarios. For example: you expect your turnover in the next 30 days to exceed the annual limit (which can happen with large, one-off sales, etc) or if you take over an existing business that is Vat-registered.

Failure to register for VAT if you meet the definition of a business as stated by HMRC for VAT purposes, can result in fines.

 

How Does VAT work?

You have to add VAT at the appropriate rate to everything you sell (usually at 20%). It is important to remember that VAT is a tax on consumers which is collected by businesses (you) on behalf of HMRC. Every 3 months you need to pay over the VAT you’ve collected to HMRC. This extra money is not yours, the penalties for not operating VAT correctly can be severe.

If you are a Vat registered business which purchases goods or services from other Vat registered companies (therefore pay 20% tax on top of the price), you can claim this tax back when you fill your Vat return. For example:

Lets assume that in a 3 month period you collect £1,000 in VAT from your customers. In the same period you also buy something from a supplier and you’re charged £200 + VAT (Total: £240).

The amount you have to give to HMRC is the VAT you’ve collected (often called “Output VAT”) minus the VAT you’ve paid out (“Input VAT”) . So in this example you’ll be handing over £960 (1000 minus 40).

You’re essentially £40 better off than you would have been if you weren’t VAT registered.

Different VAT Rates

As mentioned before, generally Vat is charged at 20% of the price. Below are few examples of different VAT rates, for full Guide please click here.

Name Current rate Description and examples
Standard 20% The standard rate of VAT is the default rate – this is the rate that’s charged on most goods and services in the UK unless they’re specifically identified as being reduced or zero-rated.
Reduced 5% Domestic fuel and power, installation of energy-saving materials, sanitary hygiene products, children’s car seat, etc.
Zero 0% Food (not meals in a restaurant or hot takeaways though), books/ newspapers, children’s clothes/ shoes, public transport etc.
Exempt Not applicable The law stipulates that exempt items must not have any VAT charged on them. Examples include insurance, providing credit, education, fundraising, membership, etc.
Outside the scope Not applicable Items that are completely outside of the UK VAT system. Examples include drawings, wages, MOT tests, rates, etc.

Voluntary Registration

If the taxable turnover of your business does not exceed the current VAT registration threshold, you can still register for VAT voluntarily.

Example and the benefit:

Your customers are mainly VAT registered businesses, so it makes no difference for them if you charge VAT, that way you can claim Vat back on the services and products you pay it on (if any).

Do not register if your clients are not VAT registered businesses, as an increase on the price of goods you sell may encourage them to look for a cheaper supplier.

 

VAT Schemes

There are three main VAT schemes available:

Standard Scheme – when VAT is paid at the end of the quarter in which you dated the invoice.

Cash Accounting Scheme – when what is paid at the end of the quarter in which the invoice been paid.

Flat Rate Scheme – you get given a flat-percentage rate dependent on the industry you are in. You can’t claim back any VAT on your purchases (with a few exceptions), but you don’t hand over all of the VAT you receive to HMRC.

 

If you would like to find out more please give us a call on 0207 267 6665.

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