Do you know what rate of VAT to charge and when to become VAT registered?

Several years ago a business was put in touch with me about their VAT situation because they had been told by their accountant that they didn't need to be VAT registered.  They had been trading for a few years and sold products which would have been zero rated had the business been VAT registered.  They were told that, as sales of the new product they were introducing (which would be standard rated although they weren't entirely sure about that) would not reach the VAT threshold, they did not have to register for VAT. That advice was incorrect because their sales of zero rated products were already over the VAT threshold.

Sales which are zero rated are a rate of VAT of 0% and are included in your calculation to identify if you have reached the threshold for VAT registration.  You don't ignore them and add up only the products which are at 20%.  The only rate of VAT you ignore when calculating whether you should be VAT registered are VAT Exempt sales and there are very few of those.

As a business owner you are responsible for understanding the VAT implications of what you sell and keeping track of your turnover every month if you are getting close to the VAT registration threshold.   You do not charge VAT if you are not VAT registered but if you are and some of the product you sell are standard rate for VAT (20%) then you must charge VAT on those particular products.  

In the food and catering industry, for example, the rate of VAT to be charged varies depending on what is being sold and how it is being consumed.  It is therefore vital for business owners in this industry to fully understand the VAT treatment of the items they sell.  

HMRC provide a list of VAT rates for different goods and services which you can access on their website.

Businesses which sell only, or mostly, zero rated products may find it advantageous to voluntarily register for VAT before they reach the threshold because that enables them to claim back VAT on all their purchases. If this was the case we would first look closely at the purchases the business generally makes and decide whether it would be worthwhile to be VAT registered.  A business which sells mostly zero rated goods will purchase mainly zero rated materials and the only VATable purchases may be packaging, telephone bills, and services from VAT registered companies for example.  The benefit against the additional work and/or cost must be identified before a decision is made on voluntary VAT registration.

However voluntary VAT registration prior to your fourth year of trading allows you to claim back VAT paid on set up costs if you still have those items.

The business who came to talk through their situation with me did have to become VAT registered as they were over the threshold but sadly were just outside the period of four years from set up and therefore couldn't claim VAT on the equipment they had purchased.

It is worth taking advice from your accountant or bookkeeper as well as doing some research yourself so you fully understand whether you should become VAT registered before reaching the threshold or not.  And your decision should be based on regular purchases as well as the four year deadline for set up costs.  Once you reach the threshold you do not have a choice about registering.  Your only choice at this stage is what VAT scheme to use.  Read our blog on VAT schemes for more information.