VAT can be the most complex tax for small businesses, mainly because there is often a lot of choice involved. When you start up, you don’t necessarily need to worry about VAT at all. However, if you breach the turnover threshhold without doing everything properly, it can be extremely costly.
If your taxable turnover exceeds the VAT threshold (£85,000 for the 2017-18 tax year), you must be registered for VAT.
By being registered, you will be able to reclaim VAT on your purchases, but also, you must charge output VAT on your sales.
If you sell to VAT registered businesses, this will have no impact on them as in turn they will reclaim the VAT, but if you sell to Joe Bloggs on the street, this will immediately make you 20% more expensive.
Should you register for vat if below the threshhold?
If your taxable turnover is below the threshhold, you can choose to register for VAT if you so wish, but it is not compulsory. It may be worth voluntarily registering for VAT if:
- You mainly sell to VAT registered businesses
- Your VATable purchases are high
- Your sales are zero rated
- You want to hide the fact your business is small enough to be below the threshhold
If you do register for VAT, there are then a whole host of schemes available to you depending on your business. The most common are:
- Flat rate scheme (nowhere near as good as it used to be, but can be a simplification for those with few VATable purchases)
- Margin scheme (for sellers of second hand goods)
- Cash accounting scheme (if your customers are slow to pay this may prove beneficial)