Understanding VAT (Value Added Tax) and when to register for VAT is crucial for businesses as it has a significant impact on the business finances.
The VAT threshold, is currently £85,000 per annum – If your annual turnover approaches this figure, you should keep an eye on your income and register for VAT when appropriate.
However, please note that you are not obliged to meet this threshold to register for VAT. Businesses can choose to register voluntarily before reaching this threshold, which can be beneficial in certain scenarios.
If most of your customers are VAT registered and your business incurs VAT on supplies, voluntary registration might be a good option. By doing so, you could recover the tax paid on these supplies and charge VAT on your invoices. Additionally, if you’re selling zero-rated goods, such as most food items and children’s clothes, you can reclaim the VAT and may even be eligible for quarterly repayments.
However, VAT is not always that straight forward, as it generally comes in three rates: Standard (20%), Reduced (5%), and Zero Rate (0%). These rates are applied based on the item, with most goods and services being charged at the Standard Rate. Some services and goods, like home energy for example, are charged at the Reduced Rate, while others, such as most food and children’s clothes, fall under the Zero-Rated category.
VAT also comes with its extra complexities, such as compliance with Making Tax Digital (MTD), which became mandatory for all VAT-registered businesses from 1 April 2022.
There are also different VAT schemes to consider, such as the VAT Cash Accounting scheme, which is available to companies with a VAT-exclusive turnover of £1.35m or less. This scheme allows you to defer paying VAT to HMRC on unpaid invoices, but it also means that you can’t claim back VAT on expenses incurred that haven’t yet been paid.
With these complexities in mind, VAT registration should not be taken lightly. It is advisable to periodically review your finances and carefully assess your accounts.
If you would like to discuss any aspects of VAT registration or have any VAT questions please do get in touch.