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Small Business Q&A: should I register for VAT?

We are often asked whether small businesses need to, or should, register for VAT. Of course this depends on a multitude of factors and it is important to consider the wider implications before making a decision. Here is a selection of some of the most frequently asked questions on VAT registration.

Q. When do I have to register for VAT?

A. You must register for VAT if your turnover* for the past 12 months exceeds £85,000 (2018/19), or there are reasonable grounds for believing that your turnover for the next 30 days will exceed £85,000.

In the first case, notification must be within 30 days of the end of the relevant months. In the latter case, notification must be within 30 days of the date on which grounds first existed.

If your turnover is below £85,000 you are entitled to register on a voluntary basis (see below), provided you have a genuine business.

*Talk to us if your turnover is not made up of fully taxable supplies.

Q. Is voluntary registration a good idea?

A. This will depend on your business and its individual circumstances. However, if your business turnover is near the limit for compulsory registration it may be wise to register for VAT before it exceeds the threshold, as there is a penalty for late registration.

One advantage of being VAT registered is that you can recover the VAT on your purchases (known as ‘input tax’). Credit is available for all VAT paid on inputs where a VAT invoice is available, except for tax on private expenditure, business entertainment, motor cars, certain building materials, and goods bought under a second-hand goods scheme. However, bear in mind that recovery of input tax may be restricted if the business makes both taxable and exempt supplies, and traders with fully exempt outputs cannot register or reclaim any input tax.

Some business owners also believe that being VAT registered improves their credibility and standing amongst clients and competitors, as it implies that the business has a solid turnover that exceeds the VAT threshold.

Q. Are there any disadvantages to registration?

A. Once you are VAT registered, you must charge VAT on any relevant goods or services. This means you will need to add 20% to the price of standard rated goods. If most of your customers are also VAT registered, the additional charge will not affect them (they can claim back the 20% VAT). However, if your customers are private individuals or non-registered businesses, they will not have this luxury and you may lose custom if they can source an alternative supplier, who can provide the equivalent goods or services at a lower cost.

Registering for VAT usually results in increased paperwork, as you are required to submit returns every three months and maintain demonstrably accurate records. However, if you only make a few purchases you may benefit from the VAT flat rate scheme for small businesses, which simplifies the VAT records you need to keep – please ask us for details.

Failure to comply with the complex legislation can also result in substantial penalties.

Q. When can I, or must I, deregister?

A. You must deregister when taxable supplies are no longer made, eg. when trading ceases. You can deregister when anticipated turnover for the next year (measured from any time) is less than £83,000, but this may not be in your interests – seek our advice first.

Q. What schemes are available?

A. HMRC operates a range of schemes which are designed to simplify accounting for VAT. These include the annual accounting scheme, the cash accounting scheme and the flat rate scheme for VAT. There are also a number of VAT schemes available for retail businesses. For more information on these schemes and to discuss how you could benefit, please contact us.

We would be happy to answer any questions relating to VAT and your business. We can also assist with the registration process and help with completing VAT returns if required.