If you're trying to get your new business off the ground, you probably haven't had a chance to study the UK's VAT registration rules - and who can blame you? You're far too busy trying to make your business turn a profit and pay the bills to even think about that right now.
I have helped many companies in a similar situation and I can tell you with 100% certainty that you're not alone. What I can also tell you is that in general, for small start-ups, registering for VAT is a regulatory burden you can do without in the first 12-24 months of your business.
Regulations in the UK require you to register for VAT if your annual taxable turnover is over £85,000. If you don't reach that minimum threshold, you are not required to register. However, there can sometimes be a great commercial benefit in registering for VAT from the very start.
Being registered for VAT in the UK allows you to offset the VAT you've paid on goods/services you've bought with the VAT you've had to charge your customers. The difference between the two is what you settle with HMRC.
In the early months of a business just setting up, you may have paid out a lot of your start-up capital on machinery, labour and administrative costs or any other costs associated with starting your business. In most cases, you will have been charged VAT on these purchases.
Cash flow is hugely important in the first year of your business and one good reason for registering for VAT right from the start is that in your first quarter, you can 'reclaim' all of that VAT you've paid. In the early months of a business, I often find that the purchases you make far outweigh the sales and registering for VAT allows you to claim back some of that cash you've paid out to suppliers, freeing up some much needed cash to reinvest.
An example would be an eBay store or e-commerce store just starting out. If you spend £20,000 on stock, the VAT portion of those purchases will be 20%, or £4,000. That's
a lot of cash you could use to help grow your business which you otherwise would not have access to if you were not registered for VAT.
The important take away point about voluntary registration is that sometimes it's best to not voluntary register and sometimes you should register, but whether you do or not comes down to your individual commercial circumstances and which decision works out best for you.
It's usually to easy to work out which decision is best - which one puts YOU in the most profitable or cash-rich position?
Still struggling with VAT? Try our VAT Calculator and see how much VAT you should be paying.