< Go Back VAT Registration - sooner or later? Posted: Sep 11, 2019 VAT
registration - sooner or later?
Once
a business is up and running, the next major administrative area to be faced
often concerns the subject of VAT. At first glance, it looks complicated - not
to mention time-consuming - particularly for small businesses. However, taken
one step at a time, the rules governing VAT registration and invoicing are
generally quite straight-forward and relatively easy to navigate.
The
law states that all traders - whether sole traders, partnerships, or limited
companies - are obliged to register to charge and pay VAT once their taxable
turnover reaches a pre-set annual threshold, which is currently £85,000. Broadly,
a business must register for VAT if:
its taxable outputs, including zero-rates sales (but not exempt,
non-business, or 'outside the scope' supplies), have exceeded the registration
threshold in the previous 12 calendar months - unless the business can satisfy
HMRC that its taxable supplies in the next 12 months will not exceed a figure £2,000 below the registration threshold (so currently £83,000); or there are reasonable grounds for believing that the business' taxable outputs in the next 30 days will exceed the registration threshold; or the business takes over another business as a going concern, to
which the two bullet points above apply. A
business can register for VAT voluntarily if its turnover is below the
threshold and it may actually save tax by doing so, particularly if its main
clients or customers are organisations that can reclaim VAT themselves.
Example
Sandra
is a non-VAT registered carpenter and a basic rate taxpayer. She buys a new saw
to use in her business, which cost £100 plus VAT, so she pays a total of £120
(£100 plus VAT at 20%), which can be set against her business profits for
income tax purposes. As Sandra is a basic rate (20%) taxpayer, she will save
tax of £24 (20% of £120), so the saw actually costs her £96. However, if the
business is VAT-registered, the £20 VAT paid on the item (the input tax) can be
reclaimed and £100 is set against business profits for income tax. The tax
reduction is therefore £20 (20% of £100) and the saw actually costs her £80 - saving £16 by being registered for VAT.
Is non-registration
preferable?
VAT-registered businesses supplying goods and
services to private individuals often feel dis-advantaged compared with their
non-registered counterparts because they have to charge an additional 20% on
every bill issued.
A trader who does not want to have to register
for VAT, may be able to stay below the annual VAT registration threshold by
supplying labour-only services and getting customers to buy any goods needed
themselves.
Example
Bob is a non-VAT registered plumber, but his
turnover is creeping up towards the VAT registration threshold. He could ask
his customers to buy materials for a job directly from a DIY shop. Although the
customers will have to pay the VAT on these items, they won't have to pay VAT
on Bob's invoice for labour services. This will also have the additional
advantage of reducing Bob's annual turnover for VAT registration purposes.
Registration
benefits
Deciding whether to register for VAT
voluntarily before the registration threshold is reached is a big decision that
can have lasting implications for the financial health of the business. It is
vital therefore, that the matter is given careful consideration. There are
several positive reasons supporting voluntary registration, including:
Reclaiming VAT
- although a registered business will have to charge VAT on goods and services
(known as charging 'output tax'), it will also be able to reclaim VAT that it
is charged by other businesses (known as 'input tax'). Where input tax exceeds
output tax in a given period, the business will generally be able to reclaim
the difference from HMRC. Marketplace
perceptions - some businesses choose to register for VAT in order to appear
larger than they are. Customers are likely to be aware of the £85,000
registration threshold and where a business is not registered, its customers
will know that the business turnover is lower than this. A business may
therefore consider registration as a way of increasing its standing amongst
competitors, and in the eyes of clients. Partner note: VATA 1994, Sch 1;
HMRC VAT Notice 700/1