Most people just setting out in business are aware that at some point in the future they may have to register for VAT, and know that the point at which you must register is based on a certain level of turnover.
Whilst this is true a lot of people do not realise that you can register for VAT voluntarily before your business reaches this threshold, and even fewer people appreciate that there are sometimes circumstances under which it would be advantageous for your business to do so.
Compulsory VAT Registration based on Turnover
The threshold for registering for VAT is currently £70,000, but what exactly does this mean? (NB. Update July 2011 – the threshold is now £73,000)
It means that is your total taxable (zero or standard) turnover over the past twelve months reaches £70,000 (update July 2011 – £73,000)you have to register for VAT. As your business grows it is good to get into the habit of checking this regularly. As your turnover edges up towards £50,000 – £60,000 in the past year, it is worth checking monthly. At the beginning of each month tot up your turnover invoiced in the past twelve months. If it reaches £70,000, (update July 2011 – £73,000) or if you anticipate reaching that amount in the coming 30 days, then you have to register for VAT.
If you consider the fact that you’ve reached £70,000 (update July 2011 – £73,000) to be an unusual, one-off occurrence, and that you will not maintain that level of turnover, then you can apply for exception from registration so long as you can demonstrate that although your turnover has reached £70,000 (update July 2011 – £73,000) , in the longer term you will only be operating with a turnover below the de-registration threshold of £68,000 (Update July 2011 – £71,000).
Voluntary Registration for VAT
There are potential cashflow advantages to being registered for VAT, and if your business falls into either of the following categories then it is worth considering applying for VAT registration even if your turnover is below the £70,000 threshold (update July 2011 £73,000).
Does Your Business Make Zero-rated Supplies?
If your business makes mostly zero-rated supplies then it can be beneficial to be VAT registered as you do not have to add VAT onto those sales, but you can claim back the VAT on all business purchases and overheads (subject to certain rules) relating to those sales. This could mean that you qualify for a refund from HMRC each quarter.
Are All Or Most Of Your Customers VAT Registered Businesses?
The main issue with becoming VAT registered is that you have to add an extra 20% onto your invoices. If your customers are members of the public this instantly makes you more expensive.
But if your customers are other VAT registered businesses, then they are able to claim back the 20% VAT that you have to charge them, and so ultimately the fact that you might be VAT registered will make no difference to them. At the same time you are able to claim back VAT on all purchases and overheads you make.
If you have any queries or comments we would be delighted to hear them. Please contact us or use the comments option below.
Image courtesy of Lyme Bay Winery