Is It Worth VAT Registering Your Professional Services Business?

The simple answer is ‘it depends’. You have to consider factors like the nature of your service, whether your suppliers are also VAT registered, and not forgetting that things can change in business. Let’s explore VAT in this new blog! 

When is VAT Registration Mandatory?

First off, let's start with when you have to register for VAT:

1. If your taxable turnover surpasses the VAT limit (currently £85,000).
2. If you foresee your annual taxable turnover exceeding £85,000 in the upcoming 30 days.

Remember though, these limits should be reviewed every 30 days and over 12 months. However, if your turnover goes over £85,000 in a 12-month period, VAT registering must happen within 30 days from the end of the month when you exceed the limit. 

Can You Register Voluntarily?

Yes, you can. Even if your business has a taxable turnover below the VAT threshold, you can still opt to register, provided you make some taxable supplies. If your business only makes exempt supplies, then you can't register for VAT.

Next, let’s look into the perks and downers. 

The Perks of VAT Registration

First off, you can claim back most of the VAT on goods and services you buy from other VAT-registered businesses. Plus, your VAT-registered clients can claw back the VAT you charge them from the taxman. So, that means your costs to them stay the same, and you can recover any input VAT on your expenses. 

If you sell zero-rated items (like kids' clothing), output VAT is applied at 0%. Goods won't cost your customers more, but you can still reclaim input VAT on business expenses. The zero-rated item list is here.

Credibility-wise, being VAT registered could give your business a big boost as you seem successful and reliable. This could encourage sales. Charging VAT should increase your cash inflow, at least temporarily. How? Well, the output VAT doesn't need to be paid to the taxman for up to four months after the supply, so your cash flow improves. This does assume that your customers pay you on time though!

When you register for VAT, you may be able to claim input VAT on certain goods bought up to 4 years ago. Also, you can claim on services provided up to 6 months before registration. 

The Downers of VAT Registration

Increased admin work. Yes, I’m afraid so. VAT-registered businesses must account for VAT and display specific information on invoices. Plus, quarterly VAT returns must be submitted digitally using tax software. Even worse, if your suppliers aren't VAT-registered, you'll have no input VAT to reclaim! 

Much worse, once registered, your business could face penalties from HMRC for late or incorrect VAT returns. And yes, this applies even if you registered voluntarily. Stress?

Competition-wise, non-VAT-registered customers might shop around for cheaper prices from non-VAT-registered competitors. Last of all, navigating the complex rules of VAT registration might require professional help and extra costs. 

Understanding VAT Retail Schemes In The UK

When you're in the retail business, calculating your VAT is crucial. For items sold with VAT included, you'll need to subtract the VAT to record in your VAT account.

Conversely, for goods sold without VAT, you must add it. VAT retail schemes simplify this process. Rather than determining the VAT for each transaction, you only do it once per VAT return.

There are three primary VAT retail schemes:

1. Point of Sale Scheme - VAT is identified and logged at the time of sale.
2. Apportionment Scheme - This applies when you purchase goods for reselling.
3. Direct Calculation Scheme - Used when a small number of sales are made at one VAT rate and most at another.

If your turnover, excluding VAT, exceeds £130 million, you must establish a bespoke retail scheme with HM Revenue and Customs (HMRC).

You may combine a retail scheme with the Cash Accounting Scheme and the Annual Accounting Scheme. However, retail schemes cannot be used with the Flat Rate Scheme. Read more on the UK Government website.

VAT Registering or Not?

If the majority of your customers are VAT registered, it probably wouldn’t affect your sales, and you would be able to reclaim any VAT you have. Plus, you have to consider the extra paperwork, compliance, and reporting requirements. The question of VAT registration really depends on your business circumstances.

The best way to remove the pressures of managing VAT is to get us to do it. Nutshell Accounts can manage your VAT, help you choose the best accounting software for your business, and provide ongoing training and support—peace of mind all in a nutshell! 

Want to know more? Call us today or drop us a line via email to arrange an appointment. 

Sources

1. https://www.companywizard.co.uk/blog/pros-and-cons-of-being-vat-registered
2. https://www.1stformations.co.uk/blog/vat-registration-the-pros-and-cons
3. https://www.fkgb.co.uk/insights-and-facts/is-it-good-or-bad-to-register-for-vat/
4. https://www.freshbooks.com/en-gb/hub/taxes/benefits-of-being-vat-registered
5. https://www.ask-the-boss.co.uk/to-vat-or-not-to-vat
6. https://greaveswestayre.co.uk/news-and-events/blog/should-i-register-my-business-for-vat/