Should I be registered for VAT?

A common question amongst small business owners is whether or not they should register for VAT.

If your turnover (total sales) in the previous 12 months exceeds the compulsory registration threshold which is currently £81,000, then yes – you must register. Failure to do so can result in fines.

It’s important to note that this is on a rolling 12 months basis, that is, the last 12 months from any given point, not based on solely turnover in a calendar or accounting year.

But even if you haven’t exceeded the threshold for compulsory registration you can still register voluntarily if it makes sense for you to do so.  We can always put the pros and cons of voluntary registration to help you decide if its right for you.

How does VAT work?  Well essentially you add VAT at the appropriate rate to everything you sell (usually at 20%). This additional income isn’t yours – you’re collecting it on behalf of HMRC (HM Revenue & Customs). Every 3 months you need to pay over the VAT you’ve collected to HMRC.  But when you buy items from another VAT registered business – they have to charge you VAT and you can claim this back, and just pay the difference.

So, lets assume that in a 3 month period you collect £1,000 in VAT from your customers. In the same period you also buy something from a supplier and you’re charged £200 + VAT (Total: £240).

The amount you have to give to HMRC is the VAT you’ve collected (often called “Output VAT”) minus the VAT you’ve paid out (“Input VAT”) . So in this example you’ll be handing over £960 (1000 minus 40).

You’re essentially £40 better off than you would have been if you weren’t VAT registered.