Should you register your business for VAT?
Many business owners often misunderstand VAT. While some are obliged to register for VAT, others can choose to do so of their own accord. So, why might registering for VAT be a good idea, and when should you register?
What is VAT?
Let’s briefly discuss what VAT is, just to make sure we are all on the same page. VAT, also known as Value Added Tax, is a general, broad, consumption tax based on the value added to goods and services. It applies to most goods and services that are bought and sold for consumption in the EU. Therefore, products for export, those that are sold abroad, are not usually subject to VAT. However, imports are taxed to keep the competition fair for EU producers. If you become VAT registered you will have to reflect this on your invoices.
When do you have to register for VAT?
If your taxable supplies exceed the VAT registration threshold during the course of 12 months, you are legally obliged to register for VAT. The limit is currently set at £85,000 for 2017/18. Essentially, if your turnover for taxable supplies exceeds this amount, or if it is going to in the immediate future, you must register for VAT. Remember though, the threshold relates to turnover, not profit. As a result, many companies will need to register quickly.
When might voluntary registration be a good idea?
Some businesses decide to register for VAT even if they don’t meet the threshold. This can have lasting impacts on your cash flow, so choosing to do this requires thorough contemplation. The main reasons why a company may decide to do this is, firstly, to reclaim VAT. Although you need to charge VAT on all your goods and services once you are registered (output tax), you’ll also be able to reclaim VAT that you are charged by other businesses (input tax). As long as your input tax exceeds output tax, you can reclaim the difference from HMRC.
Secondly, if you register for VAT, your business may appear larger than it is. Your clients will be aware of the £85,000 threshold and assume your turnover is above this. Therefore, you can use VAT to improve client perception of your business against your competitors.
These benefits are worth thinking about, but VAT registration also has its disadvantages, sometimes outweighing the benefits. For example, if your output tax exceeds your input tax, you’ll have to pay the difference to HMRC. This can create a disjointed and weak cash flow that underpins your business, making it fragile. You’ll also have a lot more paperwork to complete as you’ll have to implement VAT accounting in your financial management. It’s something you have to be even more concerned about if you’re a new company.
Whether you decide to register for VAT comes down to what you want from your business and your business’s ability to maintain a healthy cash flow with the added strain of VAT. Whatever you do though remember to take it seriously – taxes are no laughing matter.
There are benefits and downsides to registering for VAT. However, Big Hand can help reduce the drawbacks by taking control of your business accounting. That way, you can register for VAT without having to worry about the extra paperwork taking over your valuable time. Get in touch with us today on 0161 327 2911.