When is a business obliged to register for VAT?

If you are VAT registered then VAT is applied to all the products and services you provide to your clients, and you can reclaim the VAT on purchases you make via your company (subject to the conditions of any special VAT scheme you join). The standard rate for VAT (which you charge to your client) is 20%.

If your VAT taxable annual turnover either exceeded £90,000 in the last 12 months or is likely to reach the £90,000  threshold in the next 30 days then you must register for VAT.

Voluntary VAT registration

If your business has a VAT taxable annual turnover below the £90,000 threshold, you can opt to register voluntarily and for many businesses it is financially beneficial to do so. Below are the arguments for and against voluntary registration.

Arguments for:

  1. Lower costs and increased profit – VAT registration means that VAT is reclaimable on any purchases that you make for your business. This has the effect of lowering your costs and therefore increasing your profits.
  2. Perception to your potential customer base – VAT registered companies are often perceived to be bigger and more established. This can be appealing to some potential clients but is certainly a favourable perception when it comes to lenders, investors and suppliers.who will assume that turnover is more than £90,000 because your business is VAT registered. Once VAT registered, a business will be supplied with a VAT registration number which can be displayed on websites, letterheads, invoices etc
  3. VAT claims can be backdated four years – If sufficient evidence can be supplied to HMRC regarding VAT liable purchases that you have made for the business, claims can be made dating back four years.
  4. Keeping records up to date for VAT purposes allow for better business decisions and more accurate accounting advice.

Arguments against:

  1. VAT registration may make your pricing less competitive – Charging VAT on top of your prices for your products or services may make your business less attractive from a price perspective than your competitors, particularly for customers who are not VAT registered themselves. This will be very relevant for businesses who sell products or services to the general public rather than predominantly business to business sales.
  2. Risk of large VAT bills from HMRC if VAT output exceeds VAT input – If a business were to receive more VAT on products sold than they were to spend on VAT charged on products and services bought from other business, the difference would need to be paid to HMRC.
  3. Increased administration – There is no doubt that VAT registration generates additional paperwork, businesses are expected to keep all relevant invoices and receipts (ie those where VAT has been paid), maintain VAT accounting records and submit VAT returns every quarter.

Different VAT schemes, eligibility criteria and their pros and cons all in one table!

Scheme & how it works

Eligibility

Pros and Cons

Annual Accounting

 

 

Advance VAT payments are made by the business towards your VAT bill based on your last return (or estimated if you’re new to VAT)

Estimated VAT taxable turnover for the next 12 months is £1.35 million or less

Pros:

• Reduced workload – Submit one VAT return annually
• Simplified process – Payments can be made towards your VAT bill in advance, breaking the process down to monthly or quarterly payments.
• Makes managing monthly finances easier – Payments can be made by direct debit or via a choice of electronic payments

 

 

Cons:

• Not suitable if you anticipate regular VAT repayments
• Obligation to tell HMRC if your VAT liability is likely to be significantly different to the previous year
• VAT claims can only be made once per year – May not be beneficial if you regularly claim back VAT
• Potential for inaccurate payments – The figure is based on the amount paid in the previous year.  If your business’ turnover decreases, you will still have to pay the previously agreed rate until the end of the year, when you are able to claim a refund

Cash Accounting

 

 

VAT is calculated on actual cash receipts and payments rather than based on invoice dates

Estimated VAT taxable turnover for the next 12 months is £1.35 million or less

Pros:

• Can greatly improve cash flow – VAT only has to be accounted for once payment has been received for an invoice, VAT does not have to be paid on bad debts.

 

 

Cons:

• VAT paid cannot be reclaimed on purchases until you have actually paid for the relevant goods or services.

Flat Rate

 

 

The business pays a fixed rate of VAT to HMRC and can keep the difference between what it charges its customers and what it pays to HMRC

Estimated VAT taxable turnover for the next 12 months is £150,000 (excluding VAT) or less

Pros:

• Less administration for the business
• Potential to increase profits
• 1% discount on the applicable flat rate for new businesses in their first year of trading

VAT cannot be reclaimed on purchases except for certain capita; assets costing more than £2,000.                    Limited cost businesses are restricted to a higher fixed rate of 16.5%, those businesses that do not fall into the limited cost category can apply rates ranging from 4% to 14.5% depending on the business sector or type

 

The business will have to leave the scheme if annual turnover has exceeded £230,000 (inclusive of VAT) on the anniversary of joining the scheme

Cons:

• VAT cannot be reclaimed on purchases
• It is not always clear which flat rate percentage a business should use and HMRC will not advise.
• Not suitable for businesses who may quickly surpass the £230,000 upper turnover limit

Standard VAT Accounting

 

 

Businesses repay the VAT charged on all their invoices to HMRC each quarter based on the previous quarter, whether the business has received payment for those invoices.  They can also reclaim the VAT that they have paid on purchases in the previous quarter, regardless of whether they have paid for those purchases.  The amount of VAT payable, will be the excess of the VAT charged to customers over the VAT paid on purchases.

This scheme can be used by all businesses; however, one of the other schemes may be more suitable, if the eligibility requirements are met

Pros:

• Great for cash flow – VAT can be reclaimed on goods and services you’ve been invoiced for, even if you haven’t yet paid for them

Cons:

• Can be a cashflow drain – You are required to pay VAT on invoices you have raised, even if you haven’t yet received payment from your customers

 

Depending on the type of business and your annual sales, you may be able to choose to use a simplified VAT scheme. Below is a table which includes a brief summary of the main VAT schemes, how they operate, eligibility criteria and the pros and cons of each scheme.

The decision to register voluntarily for VAT is a complex one for many small businesses, if you have any questions or would like further information about VAT registration, please contact Trinity on 02475 185286  or book your free consultation.

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