VAT or Value Added Tax is an indirect tax charged on most goods and services in the UK and across the European Union. Today, we’re tackling VAT registration.
Making An Informed Decision
Time and time again we hear this statement from business owners….’my business has not or will not reach the current VAT registration threshold so I’m not going to register for VAT’.
This way of thinking could end up costing you and your business thousands in unnecessarily paid VAT. What you should be doing is making an ‘informed’ decision about VAT registration and not a linear one.
Google searches will help you answer the question ‘when do you NEED to register for VAT’. But the more important question you should be asking yourself is ‘why SHOULD I register for VAT and how can it benefit my business?’
This where you need to take a step back, take just one hour of your time to do what is called a VAT evaluation.
The key objective here is, if the numbers work for your business, then you should strongly consider registering for VAT voluntarily below the current threshold. It’s about basic business maths. As business owners, it is your duty to your business, suppliers and customers to make the right decision based on your numbers, and not just a google search that provides you with linear and fragmented knowledge.
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4 Key Benefits of Voluntary VAT Registration
1) – You can reclaim Input VAT on expenses incurred.
Now this benefit is arguably the most significant in the majority of scenarios.
Imagine you’re a start up business and you’ve had to incur £10,000 of investment in goods, services and hardware to get set up and going.
Let’s assume the £10,000 spend included VAT and was on a VATable goods, services and hardware. Now this is not uncommon in reality, as items such as laptops, peripherals and services such as accounting and IT are 20% VAT-able.
If your business is NOT VAT registered then it will have paid £1,667 in what is known as input VAT. And it cannot reclaim any of it back from HMRC. And what’s more, this ‘input VAT’ reduces your profit levels too as it becomes just another expense.
If your business IS VAT registered, then the £1,667 can actually be claimed back from HMRC giving your business valuable cash inflow and the same amount avoids the income statement assuming it’s the standard scheme, in other words it does not reduce your profits.
And yes, the flip side to this is that you will have to charge VAT on your supplies to customers, but this is where you need to conduct a VAT evaluation to know your numbers.
If your customers and clients are heavily weighted towards business clients, who are often VAT registered themselves, then the chances are your business will benefit from being VAT registered voluntarily.
If your customers and clients are predominantly consumers, who aren’t VAT registered, then it may not benefit your business, but again not in all cases.
2) Flat Rate Scheme
For some industries, it can be a no brainer. Again so long as your clients are predominantly B2B supplies
The flat rate scheme is an administratively simple way of accounting for VAT. And again, If the numbers work for your business, you should strongly consider voluntarily VAT registration.
Again, conducting a VAT evaluation in advance will help you make an informed decision as to whether the scheme is or isn’t beneficial for your business in the upcoming year of trade.
3) Pre-registration VAT
An often overlooked HMRC secret. Your business can reclaim VAT that was incurred on goods and services prior to registering for VAT. So in other words, a VAT reclaim on goods for business purposes can be backdated up to 4 years and services up to 6 months.
So let’s say your business registered for VAT on the 30th September. On the 8th May in the same year, your business incurred £1,000 of VAT on professional services when it was not Vat registered. As a result of registering on the 30th Sept, your business can claim this back under pre-registration input VAT.
4) Prestige & Positioning.
Being VAT registered suggests you are a more prestigious, and established business. If you are not VAT registered this can often suggest you are a small business, potentially limiting your potential clients.
This benefit is often passively ignored as insignificant simply because it’s difficult to measure. But through our years of experience, I can emphatically tell you that a VAT registered businesses carry more prestige and credibility in the eyes of both suppliers and customers, particular business customers.
Not being VAT registered positions your business as very small and we have witnessed credible businesses refusing to do trade with non VAT registered businesses.
So how can you go about a VAT evaluation? Well, as we’ve said before, engage with an accountant that you trust to help you make an informed decision as to whether or not it will be beneficial to your business to register for VAT.
If you’re not sure where to start – we offer a specific VAT evaluation service for your business.