How much does a business need to earn before the VATman comes to call? That’s a common question among small businesses. The current VAT registration threshold is £81,000 for a 12-month period, but check out this figure because it tends to increase every year.
Something that doesn’t change is the fact that if you’re a VAT-registered business you are essentially a tax collector, charging VAT to everything you sell and passing the money to the HMRC every three months.
If your business is under the tax threshold but there’s a likelihood of it reaching the threshold within 30 days it’s wise to talk to the VAT authorities about it. And if you’re trading outside the UK you could also be liable to register.
On the other hand, if the business has temporarily exceeded the VAT threshold and is not likely to do so again, you will probably be able to get an exception from registration.
Of course you don’t have to be turning over as much as £81,000 to become VAT registered if you think it could be to your advantage - the latest figures show that at least 20 per cent of companies are VAT – registered when legally they don’t need to be.
For instance, if you are entitled to HMRC refunds you could be better off being VAT-registered. And of course if your customers are VAT-registered, they can get back any VAT they charged.
So just how can being VAT-registered make you better off? Here’s a simple example: in three months you collect £1,000 in VAT and in the same period you buy goods from a supplier who charges £200 plus VAT, a total of £240. The amount you give HMRC is the VAT you’ve collected minus the VAT you have paid out. So you’ll be £40 better off.
And being VAT registered tells the world that you’re turning over more than £81,000 a year – giving the impression that you’re a big established company. (Who’s to know you’re paying VAT voluntarily?)
Studies have shown that businesses most likely to voluntarily register for VAT include greengrocers and children’s shoe-shops , whose sales and purchases are usually zero-rated but they can recover any VAT they’ve been charged on overheads.
If you are turning over more than £81,000 and so should register, it’s wise not to delay – HMRC will come down on you for late registration and failure-to-notify penalties, as well as surcharges and interest.
On the other hand, if you don’t have to, you could be better off, depending on what sort of business you’re in. For instance, if most of your customers aren’t VAT-registered and can’t claim the money back, they will be paying more for goods and services by dealing with you if you charge them VAT, and so they might go elsewhere.
The standard rate of VAT is 20 per cent unless the goods are reduced or zero-rated For instance, domestic fuel and power, and some energy-saving goods are charged at only 5 per cent, while books, newspapers, children’s clothes, shoes and public transport are zero-rated.
Then there are goods and services which are completely exempt from VAT like insurance, education and credit services.
If you do decide to register for VAT, there are a number of schemes available, including:
**Standard scheme**, under which the amount you owe, or reclaim is based on the date of invoices.
**Cash accounting scheme**, under which VAT is owed at the end of the quarter in which you were actually paid for the invoice.
**Flat rate scheme** – you get given a flat-percentage rate depending on the industry you are in and don’t hand over all the VAT you receive to the HMRC.
