Do I need to register for VAT is a question I often get asked by clients. This article gives an overview of when you must register and when you might want to voluntarily register.
This is a general overview, and there are circumstances in which the rules differ. I don’t want to get too bogged down with these in this article, but you can find more detail at https://www.gov.uk/register-for-vat
As a business you have a requirement to register for VAT if your taxable turnover exceeds the VAT threshold (currently £85,000) in any 12-month period, or you expect it to breach the threshold in the next 30 days alone.
To clarify, this is a rolling 12-month period, not just the 12 months that make up your accounting year.
If you aren’t currently VAT registered and you think you are approaching the threshold, then it is important to continually monitor your last 12 months turnover, to ensure you are aware of if and when, you breach the threshold.
You must register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.
If you register late, then you will be liable for the VAT which should have been charged on any sales you made since the date you should have registered. You could also be charged a penalty.
You can voluntarily register for VAT even if you are below the threshold.
The main advantage with registering is that you can reclaim VAT on any business expenses you incur so that they in effect become cheaper.
For example, you incur a business expense of £600 which includes VAT of £100. If you aren’t VAT registered you can’t reclaim the VAT, so the total cost to your business is £600. However, if you are VAT registered and can reclaim the £100 VAT, then the actual cost to your business is £500.
The downside to this is that once you are VAT registered, you will need to add VAT to your sales invoices which, if your customers aren’t VAT registered (i.e., they are private individuals or non-VAT registered business) will make you more expensive and potentially less competitive.
However, if you customers are generally businesses who are VAT registered then they can reclaim the VAT anyway. Therefore, in this situation, your sales are no more expensive, but your costs are cheaper as you can reclaim the VAT on them.
Some businesses may also want to voluntarily register for VAT as it gives the impression of being a bigger and more established business.