When is the right time to register for VAT?

Whether you are a new business or an established business it is always worth putting some thought into when is the right time to become VAT registered.

New business owners often think that they have to become VAT registered when they become a limited company and that they have to become a limited company as soon as they start a business.  Neither of those things are true.

You can choose to become VAT registered if it is beneficial for your business.  Here are 3 reasons why it might be beneficial for your business.

1. Being VAT registered can indicate to your customers that you are a larger business than you are.

2. Being VAT registered can help your cash flow in the beginning when you are not making many sales because you are able to claim back the VAT on any purchases you make.

3. Registering for VAT will enable you to claim back VAT on any set up costs you incurred in the previous 4 years as long as you still have the items in your business which you purchased.

4. If the goods you sell are zero rated you will not have to charge VAT but will be able to claim back all the VAT on your purchases.

There may also be some reasons where it is not beneficial to become VAT registered if you do not need to.

1. You sell to individuals or non VAT registered businesses who will not be keen to pay the extra 20% you will need to charge them once you become VAT registered.

2. Your purchases are very small and the amount of VAT you can claim back on them will not be worthwhile.

However becoming VAT registered is not a choice if your turnover has reached £85,000.  You have 30 days from reaching that level of turnover to register for VAT with HMRC to avoid a penalty.

If you sell mainly to individuals then you may want to keep your turnover below the £85,000 threshold.  But if your aim is to grow your business you will need to become VAT registered at some stage and will need to price your goods or services with this in mind.  Suddenly adding 20% may mean that you lose customers so consider incorporating this cost, or at least some of it, from the beginning.  If you are selling to businesses who are VAT registered the 20% increase when you become VAT registered will not make any difference because those businesses will be able to claim back the VAT.

A business I have just started working with is expecting a high volume of sales leading up to Christmas and planned to become VAT registered before this busy period started.  But, as they are selling to individuals and not businesses, I suggested that it is far better to keep close track of sales and register as soon as the turnover reaches the VAT registration threshold.  This way they don't have to increase their prices by 20% from the start if they don't want to but if they do incorporate the 20% in their price from the beginning they will make some extra funds.  Also if they don't make the sales they expect they won't have registered for VAT when they didn't need to.

It is important to understand the VAT registration rules and to know the threshold so that you can plan for the best time to register your business.  Visit HMRC for further information.