VAT can be very confusing, and, can cause an unnecessary headache for business owners. Because of this, we wanted to break things down for you and make VAT simple. Here is a guide as to when you might want to consider voluntary VAT registration.
In this blog, we’ll look at if and when you need to register for VAT. The first thing you should understand is that it’s your responsibility to register for VAT. The VAT man isn’t going to come and find you and tell you when you need to register. When your business turnover exceeds £85,000 over a rolling 12-month period, you have to register. Conversely, if your turnover drops below £83,000 over a 12-month period then you can deregister if you wish.
Why Would I Register for VAT Voluntarily?
Any business can voluntarily register for VAT at any time. “Why on Earth would I want to do this?”, you may ask. Well, there are a number of reasons that this might be a good idea. Firstly, perception is one consideration. What we’ve found with many start-ups and small business clients is that there is a certain kudos with being VAT-registered. If you are VAT-registered, your customers (and your opposition) could perceive that you are of a certain size and status.
When Might Voluntary VAT Registration be a Bad Idea?
Another key factor in deciding whether to voluntarily register for VAT is the impact it will have on your business profits. To best illustrate this, let me give you two examples. Let me introduce you to Emma. She is a mobile hairdresser who charges £25 for each haircut she does. She averages 4 haircuts every day, totalling £100 per day. As Emma likes to take the weekends off, she only works 5 days a week, resulting in a weekly income of £500. Emma also likes to take an annual holiday and Christmas off and so, assuming she works 48 weeks a year, that provides her with an annual income of £24,000. Emma makes a number of VATable purchases every month of £800 (including VAT) for things like hairspray, gel, scissors, her mobile phone, accountancy fees, and advertising. This equates to £9,600 of business expenditure in the year resulting in a profit of £14,400.
Sandra also provides mobile hairdressing services with the same income and costs as Emma. You’ll see from the calculation shown that whilst Emma’s profit for the year is £14,400, Sandra’s is only £12,000. This is because the £25 that Sandra charges for a haircut would include VAT (20%) of £4.17, meaning that she only receives “net” income of £20.83 per haircut or £20,000 per annum. The £25 that Sandra charges is deemed as “gross” income, in other words, including VAT. On the plus side, however, Sandra would be able to reclaim the VAT on her business purchases meaning that the £800 that she spends each month would become £666.67 net of VAT. However, this doesn’t compensate Sandra for the lost income. Her profit is £2,400 less than Emma’s. If Sandra wanted to increase her profit to match that of Emma’s then she would need to increase her price for a haircut by £3.13 to £28.13. However, Emma lives just up the road, and is an equally competent hairdresser, so the likelihood is that she would lose business to Emma as she charges a cheaper price.
When Might Voluntary VAT Registration be a Good Idea?
Let’s take another example. Sam is an IT consultant providing consultancy services to VAT registered business clients. Sam hasn’t registered for VAT. Kerry, on the other hand, has chosen to voluntarily register. In this instance, because their customers can reclaim any VAT charged Kerry needn’t increase her price. She can charge her clients £24,000 plus VAT of £4,800 and her clients can then reclaim the VAT, leaving them no worse off. Kerry is also able to reclaim the VAT on her expenditure of £1,600 per annum. So, in this second example, Kerry’s profit of £16,000 is £1,600 higher than that of Sam.
So, as a rule-of-thumb, you’re potentially better off registering for VAT if your clients are VAT registered businesses. If they are members of the public or non-VAT-registered businesses, then it’s probably better not to register until you have to. And remember, if you register for VAT, whether voluntarily or otherwise, you must add VAT on all your sales invoices and quote your VAT number on them as well. Of course, in our above examples, both Sandra and Kerry are required to complete and file VAT returns each quarter but this might not as burdensome as you might think.
VAT Advice from the Fabulous Group
If you require further advice pertaining to your VAT obligations and whether or not it might be beneficial for you to register voluntarily, contact us today on 0800 112 0880 or email firstname.lastname@example.org.