Do I Need to Register for VAT?

The decision of whether to register for VAT or not is something that every business owner struggles with and whereas some of them choose to register for VAT voluntarily, some of them wait to reach the threshold beyond which registration for threshold no longer remains a voluntarily decision and rather becomes a mandatory one.

What is the VAT threshold?

As of today, the present VAT threshold in the United Kingdom is £85,000 and if your business annual turnover is more than the threshold value, then you have to register for VAT as a mandatory process and in case if you fail to register for the same within 30 days, you will be liable to the penalties and punishment. Thus it is very important to keep an eye on your annual turnover, which you can do with the help of your accounting software.

Benefits of VAT Registration

Registering for VAT is a decision which has a long lasting implication on the financial health of the organization and the business and while most of the business owners wait to reach the threshold limit before they register for VAT, voluntarily registration for the same has its own share of benefits, such as
  • Reclaiming VAT - If you have registered for VAT on your own, you will be able to reclaim VAT that you are charged by other business, also known as input tax and as long as your input tax exceeds your output tax in a given period, you will be able to reclaim the difference from the HMRC.
  • Building Impressions - It helps to create your impressions with your clients because if you haven’t done the registration voluntarily, your client will get to know that your annual turnover is lesser than £85,000. Thus it is always a better idea for registering for VAT voluntarily.

Drawbacks of VAT Registration

  • Higher costs - If you are a VAT registered business, you have to charge VAT on relevant goods and services and in case your output tax is more than your input tax, you are obliged to pay the differences to the HMRC. This particular problem has been very common and can also cause cashflow and financial planning problems.
  • Increased paperwork - With VAT registration, there comes an additional responsibility of working on the paperwork because once you are VAT registered, you have to file a quarterly VAT return and you also have to implement VAT accounting into your existing accounting system, which for sure is a lengthy and time taking process.

What you’ll need to register for VAT?

Once you have to register for the VAT, you have can do the same either online or by post and while you do the online registration, you must have the following information handy with you:
  • Your UTR i.e. Unique Tax Reference Number which is a ten digit number.
  • Your business bank account details.
  • Registered address and number of your company.
  • Details of any associated businesses from previous two years.

Which VAT Scheme should I use?

By following the above mentioned steps, you will be able to register yourself for VAT online and once it is done, the next step is to decide which VAT scheme you should use depending on the nature and types of the business. There are varies VAT schemes you can consider and weigh the pros and cons, such as:

The Flat Rate Scheme

The Flat Rate Scheme is an incentive provided by the HMRC to help simplify taxes and is used by the small businesses to work out how much VAT they have pay to the HMRC for each quarter. VAT Flat Rate Scheme, also abbreviated to VAT FRS, is designed to save time of small businesses, rather than cash and is designed to simplify the VAT return process, especially for the small businesses. The HMRC has introduced this innovative way of paying VAT to ensure that the businesses covered under the Flat Rate Scheme continue paying approximately the same amount of VAT but with a much lesser paperwork as compared to other active VAT schemes in the United Kingdom. VAT Flat Rate Scheme will affect businesses such as firms providing services that spend very less on goods including raw materials. Some of the important key points about the VAT Flat Rate Scheme are as below:
  • You should not join the scheme if your annual turnover is either equal to or less than £150,000 in the first year of business operation.
  • If you have already joined the scheme but your annual turnover has exceeded £230,000 (inclusive of VAT), then you must exit from the scheme immediately.
  • If you are a part of VAT Flat Rate Scheme, then you will not be able to claim any VAT on purchases made on goods and expenses, if it is under £1500. If the purchases made on the goods and expenses are more than £2000, then you have to ensure that all the capital purchases are on the same receipt.

Cash Accounting Scheme

This scheme is very common amongst small businesses and have to have a turnover below £1.35 million.

Annual Accounting Scheme

Under this scheme, you have the flexibility of making advance payments for your bill throughout the year.