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When to Register for VAT

On day one, you don’t need to register for VAT but most businesses will need to at some point and this article will help explain the issues to consider and how to go about it. The main benefit of being registered for VAT is that you can reclaim VAT paid on goods and services purchased for use in your business. You cannot reclaim VAT on purchases unless you charge VAT on your own sales. Charging VAT on your own sales increases your prices (or reduces your margin if you keep your prices the same) and so in some cases it can make sense holding off registering for VAT until you have to.

Key takeaways:

  • Understand VAT;
  • Find out when you are required to register for VAT;
  • Learn how to register for VAT.

When you have to register for VAT

The current VAT threshold for registering for VAT is £81,000. (This means that if your annual turnover exceeded £81,000 in the previous 12 month period or if you expect it to exceed £81,000 in the next 30 days then you must by law register for VAT). If your turnover is less than £81,000 then you can still register for VAT voluntarily. Once registered, you will need to add VAT to all your UK invoices.

Registering for VAT voluntarily

One important consideration in whether to VAT register voluntarily is if your sales are primarily B2C (business to consumer) or B2B (business to business).

B2B

If your company sells mainly to VAT registered businesses then VAT has a nil effect on the cost of your product/service to them. This is because your customers can usually reclaim the VAT on invoices that they receive. (However it’s always a good idea to state that fees are inclusive of VAT to avoid any surprises with non-VAT registered businesses). For B2B, it usually makes sense to voluntarily register ASAP because you can then start reclaiming VAT on your purchases.

B2C

If your company sells mainly to consumers (who are not VAT registered) then charging VAT may reduce the gross profit margin that you make on a sale and so it may make sense for you to hold off registering for VAT. However, it's worth noting that if you sell at a price without VAT and later start charging VAT, you are going to find it hard to increase the price of the service/goods by 20% without losing some customers. You might therefore need to consider setting your prices at a point which includes the future VAT amount. Then, when you start having to pay VAT, you can include it in your pricing without changing the amount paid by the customer. The trade off to make therefore is the margin advantage gained by not charging VAT versus the potential reclaims you can make for VAT on your own business expenses. Every company is different and so the answer to when to register will vary depending on circumstances (how much is being sold versus the expenses on which VAT can be reclaimed). The impact of reclaiming VAT on costs, a B2C example: In this example a consumer buys for £100 and costs are £80

  Pre VAT Registration Post VAT Registration (where costs are vat-able) Post VAT Registration (where costs are mainly non vat-able)
Sale price 100.00 83.34 83.34
Cost of sale 80.00 66.67 80.00
Gross Profit 20.00 16.67 3.33
Gross Profit Percentage 20% 20% 4%

In the majority of cases, companies usually volunteer to register for VAT Register because;

  • company setup fees can be substantial
  • cash flow is an issue in startups so VAT refunds are useful to increase burn rate of the company

Note - you can reclaim VAT on services for up to 6 months prior to the VAT registration date.

How to register for VAT

  1. Go to HMRC and open a Government Gateway Account
  2. After logging into the account, go to register for HMRC taxes and follow the online process
  3. The following information will be required
    • The VAT numbers of any other businesses where your Director(s) are currently a Director or have bee in the last two years
    • The Director's personal details (Incl. address, tax reference number (UTR), National Insurance number)
    • Company information (registered office, registration number)
    • Predicted turnover in next 12 months
    • Predicted EEC sales and purchases
    • Date of VAT registration (you can back date this if you need to)
  4. On submitting of the online form, you will receive an acknowledgment number and you'll get an email once the VAT number has has been issued (this usually takes 14 days)

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