If your company’s turnover exceeds £85,000 you are legally required to be registered for VAT. This means that if the total value of everything that your business sells (that is not exempt from VAT) is more than £85,000, you should already be VAT registered.
Whilst items such as postage stamps or services, insurance and health services provided by doctors are exempt, VAT is applicable in some form to most goods and services. A full list of goods and services showing which rates of VAT apply and which items are exempt can be found at https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services.
You can also register voluntarily for VAT before you reach this threshold, so this begs the question as to whether there are any benefits to registering before you are required to.
Here are a couple of factors that could help you decide:
The amount of VAT you collect and pay
If your business buys and sells stock or inventory of any type and you pay more VAT than you collect from your customers, registering before you hit the threshold could save you money.
For example, if you paid VAT of £2,500 on purchases over the year, and you only collected VAT of £1,000 on sales, HMRC would owe you money. In this scenario it would make sense to register for VAT before you need to.
If however, your business is service-based, it is likely that you collect a lot more VAT than you pay, as you do not have high overhead expenses, and as a result, money would be owed by you to HMRC.
For example, if you paid VAT of £500, but collected VAT of £2,500, it would make more sense to only register for VAT when you are legally obliged to.
Your taxable turnover proximity to the VAT threshold
If your taxable turnover is already close to the VAT threshold, you will need to keep a constant watch on this to ensure you do not exceed it before you have registered. It is important to note that the £85,000 threshold is measured over any 12-month period and rolls over month to month. It is NOT calculated per your financial year end.
The impact that being VAT registered has on your credibility in the marketplace
The perception for many businesses is that being VAT registered makes you look professional, your business is bigger than it is and it has been around longer. If your business needs this type of credibility to win new customers, registering earlier than necessary could help you grow more quickly.
The type of customers your business is targeting
Larger businesses and corporations tend to disregard smaller suppliers that are not VAT registered. If you are aiming to trade with larger businesses, registering for VAT may offer you a competitive edge against other similar-sized competitors.
Ultimately, until you hit the £85,000 threshold, it is your choice whether you get registered. So, weigh up all the factors, keep an eye on your business performance, make your decision wisely and use VAT as a positive, not a negative drain on time and resources.
If you need more information or advice about what is best for your business, come and talk to us!