If you’re a business owner or considering starting a business, you’ve probably heard of VAT (Value Added Tax), but you may still have questions about what it is, how it works, and whether it’s the right move for you. VAT is an essential part of the tax system in many countries, but navigating its complexities can be a challenge, especially if you’re new to it.
In this post, we’ll break down the basics of VAT, how it impacts your business, and explore the pros and cons of being VAT-registered. Whether you’re considering registering for VAT or just want to better understand how it works, this guide will give you the clarity you need to make more informed decisions about your business finances.
What is VAT?
Simply put, VAT is a type of sales tax which is added to most goods and services. The current VAT rate is 20%.
Do I need to register?
You can voluntarily register at any point. It only becomes compulsory if:
- Sales have reached £90,000 or more in any 12 month rolling period
- Sales are expected to reach £90,000 or more in the next 30 days
How does it work in practice?
When you register for VAT, you will need to increase your prices by 20% to account for the VAT element. Each time you make a sale, you’ll need to set aside the VAT charged in a separate savings pot.
If you are charged VAT on your expenses, you will be able to reclaim this from HMRC, effectively decreasing your costs by 20%.
Every quarter, you’ll need to submit a VAT return to HMRC, as well as pay any VAT owed. The VAT you have paid on your expenses will be deducted from the VAT that you collected from your customers. If you’ve collected more VAT from your customers than you paid on your expenses, you will need to pay the difference to HMRC. On the other hand, if you have paid more VAT on your expenses than you have recovered from customers, you will be due a refund from HMRC.
What are the pros?
- Your expenses will be less – because VAT registration allows you to reclaim the VAT element of your expenses, your total expenditure will effectively be 20% less
- May look more reputable – being VAT-registered makes your business appear more professional and credible. It shows you’re compliant with tax laws, which can help build trust with customers and suppliers.
- Provides anonymity over your finances – if you haven’t quite hit the threshold for compulsory VAT registration, voluntarily registering can keep your business performance private because customers and suppliers won’t know if you’ve reached the £90k threshold or not
And the cons?
- You’ll need to increase your pricing by 20% – if you are working primarily with other businesses, this shouldn’t be an issue as it is likely that they will also be VAT registered, meaning they can reclaim the VAT that you charge them. However, if you are working with non-business customers, they won’t be able to reclaim the VAT, meaning your pricing could become less competitive. (Psst – we have template wording you can use to announce your VAT registration, here)
- More admin work – if you plan on doing the work yourself, you’ll need to factor in the extra time spent to prepare and submit your VAT return each quarter.
- Higher accountancy costs – alternatively, if you’d rather your accountant do this work for you, this will of course bring about higher accountancy fees
Final thoughts
Registering for VAT can be a great next step for your business. While you’re not required to register if your annual sales are below £90K, it’s often beneficial if you work with many VAT-registered suppliers. Registering allows you to reclaim VAT on your expenses, which can significantly reduce your overall costs.
Considering VAT registration but unsure if it’s right for you? Get in touch today and we’ll help you figure it out.
