Unless you are turning over more than £77,000 per year, you aren't legally obliged to be VAT registered. However, there are advantages of being registered that could make it a lucrative move for your business.
– Claiming VAT back: being VAT registered means that you can claim VAT back on products that you buy for your business.
Case Study: during a 3-month period you have been paid £1,000 in VAT from your customers. In the same period, you also bought something from a supplier and were charged £400+VAT (Total: £480).
The amount you have to hand over to HMRC is the VAT that you collected (output VAT) minus the VAT that you paid out (input VAT). You pay £920.00 (the £1000 from your clients, minus £80 from your purchase)
In this scenario, you have essentially ended up with £80 more than you would have had if you weren't VAT registered.
– Building impressions: some firms register for VAT in order to appear larger than they are. Your clients will probably be aware of the £77,000 threshold so you may therefore consider registration as a way of increasing your professional standing amongst competitors.
– Increasing opportunities: Some companies will only deal with contractors who are VAT registered. When you are VAT registered, you will also be assigned a VAT number, which you can flaunt on your business website and marketing materials – some companies view this as a sign of credibility.
– Competing in the market: if you or your business is VAT registered, anybody who pays for your services will have to pay VAT on top of your invoice too. This could mean your prices end up higher than your competitors. The good news is that if you commonly deal with a lot of fairly decent sized companies, the likelihood is they will expect to pay VAT anyway.
– Paperwork: you will need to abide by established rules for VAT registered business. This means keeping proper records, invoices and submitting a VAT return every quarter.
VAT registration is not for everyone. Whether or not you choose to become VAT registered is based on a number of aspects of your business. Think carefully about:
– Industry: will the industry you're working in value VAT registration, or is it likely they would go with a cheaper competitor regardless?
– Time constraints: be honest, will you have the time or inclination to manage the extra admin? If not, you're putting yourself at risk of slipping up and incurring costly fines from HMRC.
– Benefits: do you purchase enough for your business to reap significant rewards? If not, it may not be worth the extra paperwork.
All things considered, if you still think that becoming VAT registered is right for you, find out how to register here.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.