A UK business must register for VAT if its sales exceed £79,000 in any 12 month period, or if it expects sales to exceed £79,000 in the next 30 days. If, at the end of the month you have exceeded the £79,000 limit, you will have 30 days to notify HM Revenue & Customs (HMRC) who will then register your business from the first day of the following month. So, if your business exceeds £79,000 on 13 November, you must notify HMRC no later than 30 December and your business will be VAT registered from 1 January 2014. That means you must charge VAT on all sales made after 1 January 2014. Otherwise you may be able to register voluntarily.
Why would I want to register voluntarily?
You can claim back VAT on your purchases.
A VAT number can lend your business a certain amount of credibility, by making it look larger than it actually is. Also, if you purchase from other EU countries then you may avoid incurring a VAT charge if you can exchange VAT numbers. The EU business simply charges you net of VAT.
Are there disadvantages of registering voluntarily?
Once your business has registered for VAT then you effectively become a tax collector for HMRC. This can have serious cashflow implications when you have to pay VAT over to HMRC at the end of VAT Return period. It will be imperative that you collect your sales invoices promptly as you could find your business having to pay over VAT to HMRC even if your customers have not settled their debts.
Once VAT registered there will be additional administrative burden of retaining proper books and records to record company transactions that should be fit for inspection by HMRC at any time. This is not a problem if you have an accountant or you already have a good accounting system.
Another very important disadvantage, you should consider the impact of VAT registration upon your business’ competitiveness and underlying profits.
Consider example 1, your business supplies widgets to other non-registered businesses at £10 each. Once you register for VAT you must charge VAT, so the price increases to £12 (£10 + 20% VAT). VAT registration has increased the price of your product by 20% overnight. If price is the principle driver that attracts buyers to your product, then you can see this increase will have an adverse impact on any competitive advantage you may have enjoyed. Alternatively, you may decide to keep your selling price at £10. So, you make a sale of £10 which includes VAT at 20%. £10 x 20/120 = £1.67 VAT included in the £10, your net price (before VAT) is therefore now £8.33. So, where you were previously enjoying a selling price of £10, after VAT is extracted your business can now sell at only £8.33, which will obviously hit profits.
Help with VAT Registration
My turnover is now £70,000 but I don’t like the sound of VAT registration, what can I do?
Well, HMRC have recognised that full VAT Registration can have a detrimental effect upon small businesses. Therefore, they have introduced a number of special schemes for small business which include:-
Flat rate scheme (FRS)
Using the Flat Rate Scheme you do not have to calculate the VAT on each and every transaction. Instead, you simply pay a flat rate percentage of your turnover as VAT. The rate your business will pay is usually far less than the standard rate of 20%, varying from 8.5% to 13%. Using the FRS you may not reclaim VAT on purchases, however, the reduced VAT rate means your business should save money.
Cash accounting scheme
Usually VAT is payable when an invoice is issued. In contrast, using the Cash Accounting Scheme, you do not need to pay VAT until your customer has paid you. But you also cannot reclaim VAT on your purchases until you have paid for them. Cash accounting can be beneficial for your cash flow especially if your customers are slow to pay or you have bad debts.
If you want to find our more about VAT then please feel free to contact me at firstname.lastname@example.org.
Tony Mann – Manager
Westbury Accountants and Business Advisors is an accountancy practice based in London. Westbury have been providing Accounting and Tax solutions to small and medium sized businesses since 1936. Talk to the team at Westbury on 0207 253 7272 or visit http://www.westbury.co.uk.