This article will explain everything you need to know about VAT Registration. We answer your questions to help you understand when to register and choosing the right VAT scheme just for your business.
When to register for VAT
If your business turnover is £85,000 or above, you will need to register for VAT. If your turnover is less than £85,000, you can still register voluntarily.
Main Advantages to Voluntary VAT Registration:
- Customers can Reclaim. If your main customers are VAT registered businesses, you will not suffer loss of contracts, as your customers can reclaim the VAT charged by you, from HMRC.
- Choice of Schemes. You can choose which VAT scheme is suitable for your business, thus reducing your VAT bill.
- Businesses can Reclaim Start-up Costs. VAT on assets and services often suffer in the process of starting a business. This can be recovered from HMRC in the VAT return, thereby helping start-up cash flow.
Main Disadvantages to VAT Registration:
- Accuracy Needed. You must charge the correct amount in VAT.
- HMRC Payments. Any VAT due must be paid to HMRC.
- Time Consuming. You must submit VAT returns. These can take time to produce.
- Extra Records to Keep. VAT records must be kept and a VAT account used.
Choosing the Right VAT Scheme
There are four main schemes:
- Standard VAT Scheme
- VAT Cash Accounting Scheme
- VAT Flat Rate Scheme
- Limited Cost Traders Scheme
There are also many other schemes including: VAT Annual Accounting Scheme, VAT Margin Scheme, VAT Retail Scheme and Tour Operating Margin Scheme (TOMS).
Here is an overview of the four main schemes:
- Standard VAT Scheme. This charges 20% tax. Anyone can use this scheme, without needing to tell HMRC.
- VAT Cash Accounting Scheme. This also charges 20% tax, but unlike Standard VAT Scheme, the VAT is not taken until the payment date for payment and receipt. The turnover of a company must be less than £1.35 million to join this scheme. If company turnover increases to over £1.6 million, the scheme must be cancelled.
- VAT Flat Rate Scheme. With this scheme, you pay a fixed amount of VAT to HMRC. (See How much you pay). You keep the difference between what you charge customers and what you pay HMRC. Your company turnover must be £150,000 or less to join this scheme. VAT Flat Rate Scheme provides several advantages, including:
- You get 1% off VAT in the first 12 months of registration.
- VAT on assets can be recovered if assets are purchased on the same day, and the invoices total over £2,000.
- You can use Cash Accounting in VAT Flat Rate Scheme.
- Limited Cost Traders Scheme. This scheme has a fixed rate of 16.5% VAT. It is similar to VAT Flat Rate Scheme, but differs if:
- Your goods cost less than 2% of turnover
- Your goods cost less than £1,000 per year
With VAT Flat Rate Scheme and Limited Cost Traders Scheme you need to work out what you will pay. You do this by multiplying your VAT flat rate by your ‘VAT inclusive turnover’.
You bill a customer £100, adding VAT at 20% to make it a total of £120. You are a taxi service, so the VAT flat rate for your business is 10%. Therefore, your flat rate payment will be 10% of £120 or £12.
VAT inclusive turnover is different from standard VAT turnover. It includes VAT paid on business income, as well as business income itself.