Until your annual turnover is more than £81,000 you do not have to register for VAT, but in some cases in is worth registering for VAT before you reach £81,000, this is called Voluntary Registration and it could cut your costs and increase your profits.
The cost of not been VAT registered
If you are not VAT registered when your business buys anything that is taxable you pay VAT and you cannot recover this, so you have higher costs than a VAT registered competitor who does exactly the same trade as you. This means you are not maximising your profits and you have to work harder to earn the same profit as a VAT registered competitor.
Are the majority of your customers VAT registered?
If they are then it makes no difference to them if you are charging VAT or not as they should be able to reclaim it on their VAT returns. So by becoming VAT registered you add VAT onto your sales and you pay this to HMRC and your customer reclaims it, but you get to reclaim your input VAT, which means your cut your costs, so increase your profits.
Flat Rate VAT Scheme
We have seen lots of clients save even more money by using HMRC’s Flat Rate VAT scheme. You select your flat rate percentage from HMRC’s website and then you multiply your VAT inclusive sales by this percentage to decide how much VAT you pay.
For example if your flat rate percentage is 12% and your sales for the quarter are £13,000 + VAT, your VAT bill would be £15,600 x 12% = £1,872.
You are saving because you have collected in £2,600 of VAT, but you are only paying over £1,872 meaning a profit of £728 per quarter.
Are the majority of your customers are not VAT registered?
If most of your customers are not VAT registered, then unfortunately it means that by becoming VAT registered you lose out as it’s either a price increase as your customers can’t recover the VAT or a profit cut if you reduce your sales price to stay competitive. BUT sometimes this isn’t always as expensive as it appears; it all depends on your trade so it is always worth doing some sums to see.
What to do if it doesn’t make sense to register
You will be fined by HMRC if you go over the £81,000 turnover limit and do not register for VAT. So to avoid these penalties at the end of every month you should review your previous 12 months sales and see if you have exceeded the turnover limit.