Some businesses have no choice about registering to pay VAT. If your business turns over more than £85,000 at any point during ANY consecutive 12-month period, you need to register for VAT by the end of the following month. This means you need to keep a running total of your sales each month, for the previous 12 months – you don’t just check at the end of your accounting period.
Alternatively, if you believe that your turnover will exceed the threshold during any 30-day period, you must register immediately.
Bear in mind that the threshold is not based on profit but turnover, ie your total sales, so even small businesses and startups can fall into this category. You can choose to register for VAT even if your business doesn’t meet the regulatory threshold, unless everything you sell is exempt, which is unlikely as a Which? Trusted trader.
If your turnover is below the threshold, you’ll need to work out whether the benefits of being VAT registered outweigh the disadvantages for your business.
Give your customers confidence that they’re buying from a business that they can count on. Become a Which? Trusted trader.
Benefits of voluntary registration for VAT
Create a good impression. Some companies, insurers, lenders, suppliers or clients don’t like to deal with non-VAT registered companies, as they consider them too small and risky. Being VAT registered can open up opportunities in these areas.
Reclaim VAT on goods and services you buy. VAT-registered traders can reclaim the VAT they’re charged by other businesses. This is known as input tax. You offset this against the amount of VAT you charge on your goods and services (the output tax) in your VAT returns. If you pay more input tax than you receive output tax, you can reclaim the difference from HMRC. For example, it could help to be VAT registered when you’re investing in tools, machinery, business premises or vehicles – these big-ticket items would create a lot of input tax that you could then claim back.
Disadvantages of registering for VAT
Extra costs for your customers. VAT registration means you have to charge your customers VAT – raising the overall price. If your customers are also VAT registered, this will make little difference to them, as they can reclaim the VAT in turn. However, if they are the end user, ie a member of public or smaller non VAT-registered company, then you will become more expensive to them, potentially costing more than another non VAT-registered business.
Increased record keeping and reporting. Registering for VAT also requires an increase in paperwork. Some software systems will take care of much of the record keeping and reporting for you, or you can use an accountant or tax adviser. You must:
- ensure you charge the right amount of VAT – most goods and services are charged at 20%, but there are some exceptions
- pay any VAT due to HMRC
- submit VAT returns
- keep VAT records and a VAT account.
How to register for VAT
You will need to provide details including your turnover, business activity and bank details.
Once you have registered, you will receive a VAT registration certificate from HMRC within 14 working days.
What are the different schemes available?
An accountant or tax adviser can help you decide which VAT scheme is the best for your business. Below is an overview of some of the most commonly used schemes:
On this scheme you have to complete four VAT returns a year, and any VAT owed or reclaimed is paid per quarter. Your VAT returns are based on the invoices you issue each quarter, whether or not your customer has paid you. This can cause cashflow problems for small businesses.
Cash accounting can solve the cashflow issues associated with the standard scheme, as VAT is due at the end of the quarter that you’re paid, rather than when you send out an invoice. So if you have unpaid invoices, the VAT is not payable until your customer pays up.
You also can’t reclaim VAT until you have paid for your purchases. This can be a disadvantage if you tend to buy goods or services on credit.
If you leave the cash accounting scheme, you will have to account for any VAT that you owe – including on any unpaid debts.
This scheme reduces the amount of paperwork you need to do, as you have to complete only one VAT return each year, although you need to keep the same accounting records. It is suitable for businesses with a turnover of up to £1.35m .
You pay VAT in nine monthly instalments during the year, based on your previous year’s payments, or on your estimated payments if you’ve been registered for less than a year. When you complete your VAT return at the end of the year, the difference is payable either as a balancing payment if you have paid too little, or as a rebate if you have paid too much.
Annual accounting doesn’t work for companies that regularly reclaim VAT, as you get only one payment at the end of the year. Also, if your turnover decreases you will be overpaying VAT during the year, which can be a disadvantage.
Flat-rate scheme (FRS)
If your taxable turnover is less than £150,00 you could opt for the flat-rate scheme. You pay VAT as a fixed percentage of your gross (VAT included) turnover. HMRC allocates different percentages to different businesses, depending on the industry you work in.
Anyone working in a construction-related industry such as plumbers, glaziers and roofers, whose business also supplies the goods involved in construction (more than 10% of your turnover) would be allocated a 9.5% rate.
However, if your business primarily supplies labour, and less than 10% of your gross turnover is from sales of products, then the same trades would be allocated a 14.5% flat rate. From April 2017, this will increase to 16.5% for many small businesses that supply services rather than goods.
You can check the rates for different trades on the government website or contact HMRC to find out what your rate would be should you sign up to this scheme.
The advantage of the flat-rate scheme is that it makes it easier to work out what VAT you need to pay. You don’t need to work out VAT on individual sales or purchases, you simply apply the flat rate. This provides certainty about what you will owe HMRC.
It doesn’t work so well for companies that normally receive a VAT repayment under standard accounting. Also, as the flat rates are averages, you may pay more than you would using standard accounting.
- Check our guide to insurance for traders and small businesses
- Read more about how to avoid reputational risk
- Look at the guide to different business taxes