Have you been wondering for your small business when you should register for VAT?
I get asked a lot by small business owners when they should register for VAT. Now those seeds of doubt that you sometimes have, can hold you back within your business.
So follow my video or read below, and let’s explore everything you need to know about VAT registration.
Understand your product or service
Before you consider when you have to register for VAT, it’s important to understand the service or product that you deliver. Some services will be standard-rated VAT, which means if you qualify, you have to charge VAT on them all. But there are some services which could be exempt. Examples of these could be insurance companies, it could also be financial services. So the first thing to understand when you’re considering VAT registration is what product or service you deliver to your customers, and how would this be chargeable from a VAT perspective. This is important, even before you start calculating any numbers at all.
Know your customers
An important part to understand is your customers. So if your customers are business to business, they will be able to reclaim any VAT on costs. So if you’re selling them products or services, for £1000, you can add 20% VAT to it, which makes it £1200, and they will be able to claim back the VAT. Apart from a cash flow issue, this is no skin off their nose, and it does not create an additional cost.
But if you’ve got a product or service that’s going to the consumer, the end user, then 20% Extra will be 20% extra cost to them. So it’s important to understand this because this could be the difference between you maintaining your sales or losing them.
What are your customers within your business, and can they reclaim the vat or not?
Get this consideration nailed early.
VAT threshold
The VAT registration limit is £85,000. That means £85,000 worth of goods or services that qualify for standard-rated VAT (please do not include exempt supplies in this calculation).
This amount is based on 12 months. So if within your first 12 months, you have VAT suppliers that do need to be VAT registered, then you have to register them within 30 days. Otherwise, there are potential penalties, and you need to start charging VAT on your income.
This 12-month period continues every single month and is known as a rolling calculation. So for example, the first 12 months, month 1 to month 12 will be the first 12 months. Then you would add on your next month, which is month 13 and take off month 1. So every single month, you have a rolling calculation that goes back 12 months. If this exceeds £85,000, you have to register for VAT.
Registering late
One of the pitfalls that we come across quite a bit is people didn’t realise that they have reached the threshold and not registering for VAT. If this happens, you will need to go back and work out when you were meant to register for VAT.
But the best thing you can do for any business is to keep a really tight track of your income. Even if you haven’t got a full-blown accounting system, you can keep a record of what you’re invoicing monthly.
This is great from a business growth point of view anyway because you want to eventually take your business and income up.
But also you want to know exactly with 100% clarity when you have to register for VAT, because who wants to look back 12-24 months and work out when you reached the threshold? Because potentially this could cost you a lot of money.
Voluntary registration
Voluntary registration is possible even if you haven’t exceeded the VAT registration limit. A great opportunity to do this is if you’ve got business-to-business customers, as I said earlier, they are not going to care whether you’re VAT registered as long as you’ve got a VAT invoice that you submit to them and they reclaim their VAT.
So if you are selling business to business, it may be advantageous for you to VAT register early. This will also allow you to claim the VAT from your business costs which could earn you ultimately more money.
So, what does your business serve? Does your business mainly do business-to-business or business-to-consumer?
How to register?
To register for VAT you have to fill out forms with HMRC which are normally done online. There are various questions that your accountant or advisor can help you with that gives HMRC all of the information that they need to process your VAT return properly.
Once you have been registered for VAT, you will get what is known as a VAT certificate. In layman’s terms, this means that this is the birth certificate for VAT for your company.
It will tell you when you have first registered, what entities are registered ie a sole trader or limited company, and also when your VAT quarters are.
One thing to bear in mind when you have VAT-registered, HMRC may not always put your VAT quarters in line with your year-end. Be mindful of this, there’s nothing wrong with it, but I always think it’s easier to have your VAT returns in line with your year-end because it makes reconciling a lot easier.
VAT returns
Most businesses in the UK prepare their VAT returns quarterly. It is possible to do your VAT returns on a monthly basis also. This could be for example if you’re reclaiming a lot of VAT upfront on a construction project. This will allow you to get your VAT refunds quicker, and aid with cash flow. But as a general rule, most businesses in the UK perform VAT returns quarterly.
When you’re filing your VAT returns, you have a month plus seven days to file and pay your return. And be mindful of this recently, there have been changes called Making tax digital. This means that you need to file your VAT returns electronically with an approved software to HM Revenue and Customs. So make sure you have got a good accounting system when you’re registering, so you can make this process easy.
You may ask how do I do this? Let’s address the elephant in the room: you are a glorified tax collector and you’re doing it for free. So you have to collect VAT on all your sales as a whole. And you have the benefit of claiming back VAT on your costs. This is an extra administration that you have to do as a UK business regardless.
When you’re collecting this tax, one thing to bear in mind is that this money is not yours. So whether you run regular management accounts, or whether you put this money in a separate savings account, just remember this VAT is not yours and don’t spend this.
Although it sounds like a bit of a burden for a small business in the UK, just remember, it is the law. Don’t get yourself into trouble by spending other people’s money.
I hope this article helped you with VAT registration. And if you’ve got any further questions or you need to talk to me further, please contact me here. I promise there’ll be no pushy sales pitch and I’ll just be here to answer all your questions.
