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Is registering for VAT right for my business?

Registering for VAT can be really beneficial for your business, even if it isn't yet a legal requirement for your small set-up. This article explains when you need to register and shares the different advantages and disadvantages of some of the VAT schemes.

You will learn

  • What are the benefits of VAT
  • What is the flat rate VAT scheme
  • What happens if you don't register for VAT

When and why should I register?

Registering for VAT is compulsory when the annual turnover (based on a rolling basis) of your business, calculated to the end of any month, reaches a set amount. Check out what amount this is here - the threshold can change each year. 

What happens if I do not?

If you fail to register for VAT at the appropriate time, you will be liable to a penalty – and this is calculated at 5%, 10% or 15%, depending on the delay between the date of reaching the threshold and the date which HMRC received registration notification. 

Can I register for VAT even if my turnover is lower?

Yes, and this can be a good idea – in fact, as many as 20% of all VAT registered businesses fall in to this category. 

It is worth remembering, though, that being VAT registered may make you more expensive than your non-VAT registered competitors. For example, if you are not VAT registered currently, and you sell a product for £100, then this is all your customers will pay. If you then become VAT registered, you will have to charge VAT on top, or absorb the difference yourself and reduce your profit margin. Before registering for VAT in this situation, it is probably best to have a chat with an accountant. 

What are the benefits of being VAT registered?

  • Being VAT registered means that you can reclaim the tax you have been charged when buying some goods.
  • Being VAT registered adds more credibility to your business, making it appear larger than it might be.
  • Some companies only deal with VAT registered suppliers.

What is the Flat Rate VAT Scheme?

You will need to charge the standard VAT rate on your invoices, but when you complete the VAT Return, you calculate your VAT payable using your flat rate percentage as a percentage of the total turnover, including VAT. This rate differs depending on your profession or trade, and when using the flat rate scheme, you receive an extra 1% discount for the year. If your annual turnover exceeds £230,000 per year, then you are not eligible for the Flat Rate VAT scheme.

Companies on the Flat Rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital asset purchases over £2,000. 

Flat Rate Scheme advantages:

  • Generate extra profit through paying less VAT that you charge
  • A reduced amount of paperwork for you to handle
  • An extra 1% reduction in your first VAT registered year

Flat Rate Scheme disadvantages:

  • If you buy lots of stock or other items for your business, then you cannot claim the VAT back on these

The Cash Accounting Scheme

The cash accounting scheme is best suited for businesses who do not wish to pay VAT until their customers or clients have paid for their goods or services – but it cannot be used if your annual turnover is more than £1.35 million.

Cash Accounting Scheme Advantages:

  • Benefits the cash flow of the business as you will only be required to pay VAT to HMRC once you have received payment from your customers.

Cash Accounting Scheme Disadvantages

  • You will not be able to reclaim VAT on any goods purchased until you have actually paid for them.
  • If you decide to leave the Cash Accounting scheme, any outstanding VAT will need to be paid to HMRC before you leave the scheme.

Make sure to discuss all your VAT scheme options with your accountant before deciding.

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Written by:

Dawn Clarkson

Business coach

Email Address:

Telephone: 01969 624999