Once you’ve set up your new business, the next question that may well arise is “Should I be VAT Registered?” If you expect your turnover to be in excess of £83,000 over the next 12 months, then the answer is yes, it is then compulsory to register for VAT with HMRC whether you are a sole trader or limited company.
You can voluntarily register for VAT below the £83,000 thresh-hold but you may want to consider the end user that you are supplying. For example, if you are a plumber and your customer base is consumer rather than business, by registering for VAT you will need to take into account the additional 20% VAT when quoting, which may make you appear more expensive than your competitors that aren’t VAT registered. Some businesses may voluntarily register for VAT due to the requirements of clients that they are dealing with or anticipate working with.
Flat Rate VAT Scheme
As well as the standard VAT reporting method there is the Flat Rate VAT Scheme, which can be beneficial to a small business. If you don’t generally make purchases, particularly if you are providing a service, then it is worthwhile having a look to see if you could benefit from the scheme. Turnover has to be less than £150,000 on applying to join the scheme and once on the scheme if turnover exceeds £230,000 then you are no longer eligible and have to leave the scheme. So how does it work? – Depending on the industry that you are in there is a flat rate of VAT that is applied to the gross sales for the period and it is this figure that is then paid over to HMRC. Details of the current flat rates that are in use can be found here. You cannot generally claim back the VAT on purchases. However if you do make a significant purchase of a capital asset or service costing £2000 or more, then you can make a claim to reclaim the VAT element providing certain conditions are met. The Flat Rate Scheme is much easier for small business owners to administer but as always, if not submitted on time, and correctly, then penalties do apply.
Annual VAT Accounting Scheme
There is also the Annual VAT Accounting Scheme, which you can consider if turnover is less than £1.35M. If you are regularly in the position of receiving VAT refunds from HMRC, then this probably isn’t for you. This is because returns are only submitted annually, so you would only receive the refund on receipt of the return. 10% of the annual VAT due is paid monthly in advance, or 25% quarterly based on previous returns submitted, or in the case of a new business, an estimate of the annual liability. Once the annual return has been submitted, the balancing payment is due two months after this date.
With all these schemes it is important to remember that the VAT threshold is calculated on a 12-month rolling period and not your financial year. You must notify HMRC of any changes which affect your eligibility for any of the schemes within 30 days. Once registered for VAT, you must ensure that your registration number is shown on all sales invoices that you raise. As always you should consult with your bookkeeper or accountant to review your own situation before making any decisions.