What's the deal with VAT?
I get asked a lot of questions about VAT;
Do I have to register for VAT if I become a Limited company?
Should I register for VAT voluntarily?
Is there a minimum level for registering for VAT?
What do I do if I’m not VAT registered and someone asks for my VAT number?
Why would you choose to voluntarily register for VAT?
So I’m here to clear up all these questions on the joy that is VAT.
Firstly, VAT has the same rules if you are a sole trader or a limited company, so the decision of which company structure to use has no impact on VAT.
In the UK there is a VAT threshold of £85,000 and this means that if your annual turnover is less than this amount then you don’t need to register for VAT, but you can do so voluntarily if you want (more on this later).
If you are not VAT registered then you cannot claim back the VAT on your costs, you have to pay the full price including VAT. This can make some things feel more expensive. My company is not VAT registered so I find it particularly annoying when other companies quote a price that does not include VAT – for me the price just goes up 20% as soon as I realise they haven’t included VAT.
However, not being VAT registered also means that I don’t have to add VAT onto my prices – if I quote a price to a potential client and they ask me if that includes/ excludes VAT I tell them I am not VAT registered so the price is what it is – nothing will be added on to that figure I have given them.
If your turnover hits the threshold of £85,000, or you expect it to in the coming month (HMRC’s exact requirements and the link to register is here: https://www.gov.uk/vat-registration/when-to-register) then you need to register for VAT and you will be given a VAT number.
From now on you:
can start claiming the VAT back on your costs
need to start charging VAT on your sales (and need to quote your VAT number on your invoices)
need to file quarterly VAT returns with HMRC (or get an accountant to do that for you)
If you weren’t already, you now definitely need to keep records of your sales and purchases, guidance here from HMRC on VAT record keeping: https://www.gov.uk/vat-record-keeping
You will also need to decide if you are going to adjust your sales prices to take account of VAT.
For example, if you are a retailer who buys a product for £24 and sells it for £30 before you were VAT registered, this would be the impact if you do not change your prices:
If you don’t change your prices then you’re actually losing profit by going VAT registered, which is why some people choose to review their prices at this point. While it might feel frustrating to have this tax burden put on you, but if you’re hit the VAT threshold it’s because you have successfully grown your turnover to this high level, so please recognise that achievement as well as probably feeling a bit annoyed about the extra admin burden.
Another question I get asked is about what is the difference between zero rated and exempt. The difference is if your products/ services are zero rated then it means you do not have to charge VAT on your sales, but you can reclaim VAT on your costs. If your product/ services are exempt from VAT then it means there’s still no VAT on your sales, but you cannot reclaim the VAT on your costs.
Generally things like food & drink (with some exceptions), children’s clothes and books are zero rated. And things like insurance and postal services are exempt. However, there are very detailed and specific rules around VAT, so it’s always best to double check first on what rates apply, using the HMRC website: https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services
So, with all this faff, why would businesses choose to voluntarily VAT register before they have to, well in my experience they fall into two categories:
If you sell products or services to large companies who are also VAT registered. In this case if you put your price up by 20% then your customer would not be affected because the net cost to them would be the same, the 20% VAT that you would charge on your sales would be reclaimed by your customer as VAT on their costs.
The products you sell are zero rated. If this is the case then you don’t need to charge any VAT on your sales, so the effect of registering for VAT is that you can reclaim the VAT on your costs without any impact on your selling prices.
If you have registered for VAT and then your situation changes – maybe your turnover has dropped or you had registered voluntarily but now don’t want to stay VAT registered, then you can de-register for VAT. The de-registration threshold is £83,000 of annual turnover so if your annual turnover drops below this level and you expect that it won’t go up again over the £85,000 registration threshold, you can de-register.
Also to note – it is compulsory to de-register if:
Your business has ceased trading and not expected to start again
You sell your business
If your business joins a VAT group
And you can transfer a VAT registration from one business to another, which can be used for example if your business status changes.
I hope that has helped de-mystify VAT, however it is a very complicated subject and there are often specific rules relating to specific scenarios, so it’s always best to get individual advice on this topic.
If you would like to discuss your VAT status feel free to get in touch