When to Become VAT Registered

When starting up a new business it’s very easy to fall for the common misconception that you must immediately become VAT registered – as with most misconceptions this isn’t always true. In this article we’re just going to explain the reasons when you must legally become VAT registered but also why VAT registration isn’t always required and much harder work than most people initially think.

The bottom line is this, once you become VAT registered you automatically have more administration to sort which takes additional time and money in the form of filing VAT returns which are typically due every 3 months. We’re not saying VAT registration isn’t worth it, however from experience the majority of small startup businesses don’t need to be VAT registered and end up wasting unnecessary time and money.

Just to quickly mention before we get started that you can voluntarily become VAT registered whenever you want (no matter how much you have earned or how long you’ve been set up) and we explain at the end of this article as to how you register should you want to.


When to become VAT registered

There are 3 key reasons you should be VAT registered:

  1. The first and main reason is if your business is set to make £85,000 (or more) within the next 12 months then you must legally become VAT registered. Please note this is turnover not profit – so it’s in reference to your total income (so-to-speak) not how much the business made in profits. This is a legal requirement so as soon as you reach this threshold it is compulsory to become VAT registered, no questions asked. So if this applies to you then skip to the end of this article and register for VAT!
  2. If your type of work requires VAT registration (such as a supplier to public organisations such as the NHS etc who only work with VAT registered companies etc). This is then of course a ‘no-brainer’ and means you must be VAT registered in order to make money!
  3. If your industry favours businesses who are VAT registered. Although seeming somewhat superficial, there are many industries (pharmaceuticals for example) who will 99% of the time choose to work with businesses who are VAT registered since it appears more professional. So if you find your startup business constantly being asked about VAT registration from potential clients and you losing work then this is a must, since (again) you need to be VAT registered in order to make money!


When to not become VAT registered

In the majority of cases, they are the three main reasons to become VAT registered. If none of those apply to you then our advice is to stay de-registered and see how you get on to start with. Many established self-employed people will likely proudly proclaim “yes but if you’re VAT registered then you can claim back VAT on all your purchases!” which is of course true…but this is also the case when you’re not VAT registered since you claim VAT back against your income via claimable expenses; so it doesn’t really make much of a difference and the sheer administrational work associated with being VAT registered outweighs the positives (in our humble opinion!).

The other main reason we suggest holding back from registering if you don’t need to is because, as of the moment you register, you legally have to add VAT to all of your VAT-able products and/or services. This means you may now struggle to offer cost-effective solutions to clients since you’ll suddenly be 20% more expensive than you were before. So please bear this in mind before becoming VAT registered.


Why become VAT registered?

OK…so far we’ve been quite ‘doom and gloom’ about VAT registration but there are of course positives to it as well!

The main positive is that once you are VAT registered you can reclaim the VAT on business-related products and services you have purchased . For example if you had a new website built for £2,400 and were charged VAT of £480 then you can reclaim that £480 within your VAT return. Happy days! Even right down to that stapler you bought from the stationers that cost 50p including VAT…yes…you can claim that too!

Also once registered you are able to backdate up to 4 years of VAT so can gain quite a nice sum of money from previous business expenditure that had VAT added. This is of course on the assumption that you have sufficient evidence to prove these purchases were made for your business and that you have evidence of each transaction!

Also linking back to one of our earlier points, once VAT registered you automatically appear to be a ‘bigger’ company in the eyes of your clients and will be provided with your very own unique VAT number by HMRC which you need to add to all invoices/receipts etc.

So if you’re working in a prestigious type of industry then this can go a long way in establishing your professionalism as a new business.


How to become VAT registered

So after all of this advice if you would like to become VAT registered then you simply need to follow the steps listed by HMRC on the site here –https://online.hmrc.gov.uk/registration/newbusiness/business-allowed – or if it’s something you would rather a professional do on your behalf then you can also enrol the services of a tax accountant or agent to sort this for you. If this is something you would like to do then we offer this service as part of all our monthly accounting packages here –https://www.monthlyaccountant.co.uk/monthly-accounting-prices/.