Do I need to register for VAT? In short, no, unless your company has reached the UK’s VAT threshold of £85,000. However, we’re not competing for the title of “world’s shortest blog” so we’ll explain in more detail why you might want to wait until you’re at this level – especially if you’re a start-up.
There’s no doubt that starting a business is incredibly exciting. We’re all chomping at the bit to make our companies look fantastic; providing the impression of an established organisation that can be trusted by SMEs and corporates alike. As a result, many entrepreneurs automatically think they need to register for value-added tax (VAT). It’s seen as the professional thing to do. Naturally, it’s going to look good and give your business credibility in the market. However, unless you’re above the £85,000 turnover threshold mandated by the UK government, you’re really under no obligation to do so. So hold your horses, take a step back and weigh up the pros and cons of registering for VAT.
Of course, there are benefits of registering for VAT. For some entrepreneurs, it’s worth the additional administrative costs and work it incurs. We’ll let you decide.
1. Increase your cash flow
One major benefit of registering for VAT is the fact that it improves cash flow. You’ll be able to claim back VAT costs on any set-up costs you’ve incurred that include a VAT element. Let’s be honest, every penny counts when you’re starting up a business so if you can claim cash back, it could make a massive difference. Whether you’ve purchased stock, hired the advice of expensive consultants or upgraded your IT infrastructure, you’ll be able to recoup costs.
2. Market credibility
A VAT number featuring on your business correspondence will provide customers, suppliers and other stakeholders with a professional impression of your business. Furthermore, it’ll also enhance the appearance of your company, making it appear to be a more established player on the market than perhaps it is. It’s a great way to open the door to work with customers and build long-term relationships.
3. More revenue
If your start-up registers for VAT, you might find it beneficial when submitting tenders and proposals for contracts in the market. This could be critical when tendering for projects with larger organisations; some corporates may count-out any suppliers who aren’t VAT-registered.
They all sound great don’t they? They are, but before you rush off to register, consider the negatives next.
1. Price Increases
You don’t want to absorb the cost of VAT out of your profit margin do you? Absolutely not. So if you become VAT-registered, you’ll be passing the additional costs onto your customers, making your product or services 20% more expensive. If you’re in a highly cost-competitive market where margins are already tight and consumers differentiate on price, this could be highly detrimental. While most business clients claim back VAT, the higher prices incurred can easily become a problem.
2. VAT is complex
Unfortunately, the world of VAT is a complex beast that often causes confusion. Whereas for some sectors – such as financial services – it is relatively straight-forward, it poses much more of a headache for others. Companies in industries such as manufacturing and import/export have international supply chains, therefore requiring them to take into account VAT being incurred in multiple jurisdictions.
3 It doesn’t even apply for some sectors
While the finance teams for major manufacturers are scratching their heads, accountants in the healthcare and property markets rejoice at the fact that their sectors are exempt! So whatever industry you’re launching your business in, remember to research how VAT applies before you make your decision. The last thing you want to do is charge VAT to business-to-business (B2B) clients in one of these sectors, as they wouldn’t be able to claim it back. That would be one unhappy customer.
4. Missing out on VAT due
The sheer complexity of VAT makes it easy to overlook VAT claims, meaning you lose out in the process.
5. Hire a VAT expert
We’re not all expert accountants, therefore you’ll need to hire a financial adviser to manage this. If you’re going to go through the registration process and hire an expert in this field, we recommend you have at least £10,000 in costs and £2,000 in VAT costs.
6. Increased risk of penalties
HMRC are pretty hot when it comes to VAT; you don’t get much time to turn it around. They allow five weeks to file for VAT and five weeks to pay it. If you miss those deadlines? The later you are, the larger the penalty.
It’s fair to say, there’s a few negatives to consider if you want to register for VAT when you’re not required to. We’d really recommend weighing up the pros and cons and whether it’ll benefit your business. Of course, if you’re going above the £85,000 threshold then it’s a legal requirement, but if you’re a start-up or small business that is not there yet, is it really the right thing for you?
Here at Cloud Accountant.com, our advice is to focus on the basics first. Concentrate on building your brand, capturing market share and retaining a portfolio of key clients who can help your business take off. This will help you to generate enough turnover so that when you do approach the VAT threshold, you can register in confidence that not only is it the right thing for your business – but you can handle it. Remember, unless you’re turning over a minimum of £85,000 per annum, you’re under no obligation to sign up.
If you’re looking to partner with qualified, experienced accountants who can provide key advice when it comes to registering your business for VAT, contact our team of experts today on 0113 323 1960 or Itjustclicks@cloudaccountant.com for a confidential discussion.