VAT stands for ‘Value Added Tax’ and is a tax levied upon many of the purchases we make both as businesses and consumers every day.
However, if you are running your own business, be it as a sole trader or as a limited company, you may be required to charge VAT on all sales and complete a VAT return.
However, it should also be noted that it is actually illegal to charge VAT to your customers if your are not VAT registered, therefore the first thing you need to decide is whether you are legally obliged to register and begin charging VAT.
VAT Registration as Legal Requirement
VAT registration is not something that is universally required by everyone in business.
However, if you are in business (HMRC defines a business as a continuing activity involving getting paid for providing goods or services – in money or another form of payment such as in-kind or barter), and meet certain requirements then you must complete a VAT registration.
VAT Registration is required if ALL of the below apply to you;
- Are ‘in business’ (being paid in some form for offering products or services)
- Selling any products or services that are NOT VAT-exempt (see here)
- live in the UK or your place of business is in the UK
- If your annual turnover is, or is expected to exceed the current threshold – £79,000 (for latest thresholds click here)
Voluntary VAT Registration
Even if you are not required by law to register for VAT, you can still choose to voluntarily complete a VAT registration.
This may seem counter-productive at first but, in certain circumstances, it may be beneficial to register – particularly if your business deals mostly with other businesses.
For one thing, being VAT registered and being able to charge your clients VAT will give the impression you are a larger and more successful business.
If most your clients are VAT registered as well then they will be able to claim back the VAT you charge and so it will not add any extra cost to your products or services.
Also, if you are buying a lot of products and services that include VAT on their prices then it may be beneficial to go through a VAT registration so that you can claim back any VAT you have paid and become more tax efficient.
It should also be pointed out, however, that if you are VAT registered, it will add further complexity and potentially cost to your accounting and bookkeeping practices as you will need to complete regular VAT returns. Ultimately you would be advised to consult with an accountant to establish whether voluntary VAT registration would be beneficial to your business.
What Does Being VAT Registered Actually Mean?
Completing a VAT registration basically means that you will have to start charging for VAT on all sales you make.
However, it also means that you can claim back VAT on any purchases you make that have incurred a VAT charge.
This is done by filing a VAT return each year that will basically deduct all VAT paid from the VAT you have charged your customers result in a balance that you must pay to HMRC.
There are actually different VAT schemes that you can use, each of which have their own advantages and disadvantages for which an accountant will be able to advise you.
VAT is a complex area but can have some significant cost savings for certain businesses. Whether your business will benefit or not, if your income exceeds the threshold and you meet the other requirements then you will be required by law to register. This means VAT registration often becomes a necessary consideration even if you don’t want it to!
If you have yet to start trading, or wish to reserve a company name for future use then you may wish to look at our article on using dormant companies.