VAT Registration: Should You Register for VAT or Not?
Since tax-efficiency is one of the drivers of independent working, all taxes have to be considered. Value Added Tax (VAT) is one of them and you need to decide if you should register and, if so, what scheme you should adopt.
If your turnover exceeds £83,000, you are legally obliged to register for VAT. That figure isn’t restricted to your financial year but is measured over the last twelve months from any date.
Although your turnover may be below the threshold, you can still voluntarily register for VAT. Before you do this, there are some things to bear in mind.
- Once registered, you can claim back VAT on your business expenses, which you wouldn’t otherwise be able to do. This saves you money and you may wish to estimate the extent of this.
- You must charge VAT on all your sales invoices unless, which is unlikely, your products or services are zero-rated or exempt. Business clients can claim back this VAT and so won’t bother but, for others, this is an effective price increase of 20% at current rates unless you cut your prices and profitability to compensate. So you need to assess your clients.
- You will become an unpaid tax collector for the government, filing quarterly returns and paying over collected VAT less any that’s reclaimed. You must file returns and make payments at set times, otherwise you risk financial penalties. Make sure, therefore, you can handle the administration and pay what’s due (even though it may still be owed by your clients).
- Being VAT registered may give a more professional image to your clients; it suggests at least that you have a reasonable turnover and therefore are successful.
Making the Right Choice
Most companies that register for VAT use the standard scheme, with returns being due quarterly and owed amounts payable at the same time. However, there are alternatives:
- The Flat Rate scheme, where VAT is payable at a set percentage of sales, depending on your industry. There are potential savings but you will need to compare the amount due against that for the standard scheme. Although the quarterly calculation of VAT is simpler, the need to check against the standard scheme means overall administration may be about the same.
- The Annual Accounting scheme where only one return is made each year but amounts are paid each month on account of VAT due. This simplifies administration and applies to either the Standard or Flat Rate scheme.
- The Cash Accounting scheme, where VAT is only owed when the invoice is paid, which avoids cash flow problems.
Many people see VAT as an administrative challenge that takes a lot of time and effort. Whilst VAT is undoubtedly a complex subject, its administration is made relatively simple by the use of the right accounting software.
Phoenix Cloud Accounting’s service handles all VAT calculations and reporting requirements for the various schemes and full support and advice are available to help you deal with it effectively.