When should my small business register for VAT?

Updated: Feb 19, 2019

Whether you’re a business or a consumer, everyone in the UK is used to the Value Added Tax, or VAT, charged on the majority of goods and services in the country. But unlike most taxes, this is one that businesses charge and collect on behalf of HMRC, which means small businesses need to keep a close eye on their accounting to make sure they remain compliant with tax law.

All businesses with an annual taxable turnover of more than £85,000 must register for VAT. Your VAT taxable turnover is the total of everything sold that is not exempt from the tax. This threshold is reviewed annually by the HMRC, but is being held at £85,000 until at least April 2020.

You must register for VAT if you expect to hit the threshold in the next 30 days, or if your business had a taxable turnover of more than the threshold over the last 12 consecutive months. However, you don’t have to be at that threshold to register for VAT. There is also “voluntary registration”, which is open to businesses that don’t (yet) meet the annual turnover threshold but who want to register early - perhaps in anticipation of crossing the threshold soon, or even as a way to appear as a more professional outfit to customers.

Carefully consider your options here, though. If your business is primarily B2C, it doesn’t make sense to voluntarily register for VAT as you will end up charging the end consumer more. However, if you are primarily B2B it can make sense to register as soon as you can as it will help you to start reclaiming VAT on your own purchases.

Remember, too, that if you start charging at a price that does not include VAT, but then have to start charging it, your customers regardless of industry will see this as a 20% rise in price, not as a tax charge.

So why should your small business accountants help you to register for VAT? There are multiple factors to consider.

Registering for VAT has some benefits…

First and foremost, registering for VAT gives you the option to claim back VAT on your own purchases. This can be particularly useful in startups; VAT refunds can add cash to the coffers – always helpful with the burn rate! You can also reclaim VAT on services for up to six months preceding your VAT registration date.

Finally, some small businesses - especially those who deal with large businesses on a regular basis - prefer to register for VAT for aesthetic reasons. On the surface, customers will assume your annual turnover is greater than the threshold, which can make a small business or startup appear more stable and more like a safe pair of hands.

...but it’s also got drawbacks

The obvious drawback is the extra administrative burden, especially as Making Tax Digital looms large in the lives of small business accountants. Paperwork is a pain for most small businesses at the best of times, but registering for VAT brings with it monthly reporting requirements and a need to watch the books very carefully.

Small business accountants can get you ready

HMRC will look at the total value of your non-exempt UK sales to decide whether you are at the threshold of £85,000. That means they’ll look at things like goods you hired or loaned to customers; business goods used for personal reasons; gifts; services you received from businesses in other countries that you had to “reverse charge”; and any building work worth more than £100,000 undertaken by the business for itself.

And that’s not the only thing about VAT registration and thresholds that can get tricky. This is a complicated matter, and one that’s easy to get wrong. If you don’t keep track of your business bookkeeping correctly and end up registering late for VAT, you will be liable to penalties - and the penalties increase the longer you delay rectifying things.

Small business accountants can provide advice and support to help your business understand VAT better, and to know your requirements and compliance needs. There are several VAT schemes that can make VAT easier and more manageable for SMEs; small business accountants are expert in these schemes and can talk you through the options.