Registering for VAT means that you become an unpaid tax collector on behalf of Her Majesty’s Revenue and Customs (HMRC). Once registered you have to give 20% of the price of any VATable goods or services you sell direct to the government. If you don’t register you get to keep this 20%. So why would anyone bother?
Well the first and most important reason people register is that once you reach the VAT threshold you have to. Currently the threshold is £85,000 of turnover on VATable goods and services in a year. Failure to register at this point means that once HMRC catch you, they will still make you pay the VAT but will also levy a penalty charge on top. This is normally a percentage of the VAT due. The current penalty is a premium on top of your VAT of between 5% and 15% depending on how late you are.
So your business is going to have to register for VAT at some point. You don’t have to wait until you reach the threshold though. You can do a voluntary VAT registration at any point. Many people choose to do this as soon as they start their business. There are a few reasons for this. The main ones are:
- Being registered for VAT is the norm. All decent size companies have to be VAT registered so if you are not it makes people nervous.
- As well as paying VAT, you can reclaim VAT if you are registered. So basically you can claim back 20% of anything you buy for your company.
- Registering for VAT when you are already trading makes the process much more difficult.
The last one of these reasons is perhaps the most important, and most overlooked. To understand why registering while trading can be such an issue you just have to take a look at the official HMRC advice. HMRC say that as soon as you make the application to become VAT registered you have to start paying VAT but you aren’t allowed to charge it on invoices (or reclaim it on payments). Their solution is as follows:
you should increase your prices by an amount equivalent to the VAT rate relevant for your goods or services, and explain to your customers why you are doing so.
Once you receive your VAT registration number you can then reissue those invoices, amended to show your VAT registration number and the VAT charged. This will ensure that your VAT-registered customers may reclaim the VAT that they have paid.
So basically if you try to register for VAT while you are already trading the recommended way to do it is to put all of your prices up by 20%. HMRC currently quote a month for the VAT registration process to take place. Once this month is up you would then have to re-issue invoices for all the sales you have done showing your new high price less the VAT. If you are dealing with business customers who are VAT registered this won’t bother them too much as they will be able to claim back the VAT and will end up paying the same as they always have. However for ordinary retail customers, or non VAT registered businesses, you will effectively be giving them a 20% price rise.
It isn’t hard to imagine the effect that a sudden 20% price hike, and having to redo all of your sales invoices for a month, will have on a new business. As well as potentially hitting overall sales the extra paperwork could be a significant burden. Registering for VAT from the start of you business means that you can maintain your prices at a constant level and avoid the disruption of the registration paperwork.
If you would like to register for VAT you can do it yourself through HMRC or we can do your VAT registration for you.
[Updated Jun 20]