There are many excellent articles around on when to register for VAT, including the one on the Start Up Donut, so I'll try not to repeat what is already available.
So, you’ve recently set up or are about to start your business and you want to know what to do about VAT. You should do this when you draw up your business plan and cashflow forecasts, because it could affect your profitability.
What’s the first thing you need to do? Find out the VAT treatment of what you’re selling. The key questions are: would you have to charge VAT if you were VAT-registered? If not, is that because your supplies are exempt from VAT or zero-rated?
This latter point is an important distinction. In simple terms:
- if they are zero-rated, you can reclaim VAT you pay on your expenses.
- if they are exempt, you won’t be able to register or reclaim the VAT on your expenses.
If you fall in the latter category, there’s no need to read on.
Otherwise, what you do is liable to VAT at 0%, 5% and/or 17.5%. How do you work out when to register?
The registration limit is based on the value of your taxable supplies (ie the value of what you’ve sold that attracts VAT, in the past 12 months).
Keep track of this by recording at the end of each month what your taxable turnover has been. Add up the past 12 months to see whether you've gone over the registration limit. If so, you need to apply for VAT registration within 30 days of the end of the month in which your turnover went over the limit.
If you went over the registration limit in less than 12 months, you should still apply to register at the end of that month. Don't wait for the end of a 12-month period or you might find yourself liable to a penalty.
Should you apply to register for VAT before you go over the registration limit? That’s a very difficult question to answer and one that can only be determined by you with help from your advisers. There can be benefits to being registered for VAT, particularly where you customers are wholly or mainly businesses that are VAT registered. They will be able to recover the VAT you charge. Some suggest that being registered gives your business a certain credibility, after all, who would register for VAT unless they had to?
One thing that makes this decision a bit of a no-brainer is if you are only selling things that are zero-rated because you will get back the VAT on your expenses, but not have to account for VAT on your sales. This way you get paid by HMRC when you put in a VAT return. The only thing you should consider is whether you will be claiming back enough VAT to make the hassle worthwhile.
Robert Killington, VATark