Should I register my new business for VAT? (or before I have to)
This is a really important thing to consider when starting a new business, but it’s not something you have to do straight away. If your business turnover exceeds £90,000/year, then you must register for VAT, however, it could potentially be beneficial for some companies to register before this threshold is met.
For example, if your business is not registered for VAT, but is buying products from other businesses that are registered, then the chances are that you are paying VAT on those products but are unable to claim it back. Depending on your costs, this could save you thousands of pounds if you were registered for VAT.
For example”
Your business revenue is £70,000, with £30,000 costs. This is a profit of £40,000.
If you were VAT registered then the income would be £84,000 (£70,000 business revenue and £14,000 VAT).
If you’re VAT registered you can claim back any VAT in your costs, let’s say there’s £3,000 in the £30,000. You would then deduct this from what you pay HMRC, so £14,000 - £3,000 = £11,000.
Your profit would then be £70,000 - £27,000 = £43,000, so you’re better of by £3,000.
Also, it’s important to think ahead when considering registering for VAT or setting up a new business as you don’t want to suddenly have to put your prices up once you reach the threshold. For example, a cafe or restaurant opens and sets their menu prices based on costs. They’re not registered for VAT so don’t consider it when pricing. Things go well and they pass the VAT threshold, so have to start collecting VAT on behalf of HMRC. This means that they’ll have to raise their prices to cover the VAT as if they don’t that VAT will have to come out of their profits. There are some important things to always remember in cases like this. Firstly, a business collects VAT on behalf of HMRC, that money never belongs to the business so shouldn’t be factored into business plans, P&L’s or anything else that looks at business performance. Next, when setting prices, the selling price should be set to achieve the desired profits after costs are deducted, and then VAT is added to this, so your customers will see the price which includes VAT.
To illustrate this, a coffee shop is setting its prices and for a flat white, after costs, salaries, utilities etc. are deducted the price to get an appropriate profit would be £3. They would then add VAT onto this, so the selling price to customers would be £3.60, with that £0.60 from every flat white sold going to HMRC.
In examples like the above it’s important to think about VAT from the start as you don’t want to suddenly start charging customers an extra 60p for a flat white once your business goes above the VAT threshold.
In summary, there are a few advantages to registering for VAT before you have to:
You can claim back VAT payed that you would not be able to had you not registered. This is important if your business has a lot of setup costs and purchases of equipment as you’ll be able to claim back the VAT on those sooner.
If dealing with bigger companies, being VAT registered can make you look more professional.
You don’t have to raise your prices significantly in the future to cover VAT.
There are also disadvantages:
You’ll have to file a VAT return and be on top of admin. If your accounts are in good order then this isn’t a big deal. If you keep accurate financial records then this isn’t a problem.
If your business customers aren’t VAT registered then your prices are 20% higher than they could be. Also, if you’re a consumer facing business such as a cafe then your customers will take the hit of paying for VAT.
You’ll have to start collecting VAT for HMRC and saving this money until time to do a return.
It’s important to think about all this before you start trading as whatever decision you make is likely to make a significant impact in your business in the first few years.