VAT registration. When you need to become VAT registered and why.
When starting a business up there are many costs involved in doing so. There is investment in the equipment and tools needed to do the job. There is investment in the staff, and of course training the staff up. There are a whole plethora of costs including premises, electricity and other day to day bills, phone costs, postage costs, accounting costs… the list goes on. In amongst all of this, at some point you may need to become VAT registered. This is a short summary article outlining the basics of when and why you would become VAT registered.
In most cases, VAT is a 17.5% tax that is added to goods and services levied. You already pay VAT on so many products and services; so many that you may not even notice yourself doing it anymore. If you are running a small business, it is probably easier to not be VAT registered as essentially the first thing that happens is that you have to start charging your customers 17.5% more for your products and services. At the point at which you are supplying good of services that equal more than £67,000 over the previous 12months, you have to become VAT registered. If you have not hit this yet, you may wish to stop reading this article now.
If you have hit this, you may want to know the basics of how it works. From then on, you charge all your customers 17.5% tax on top of your charges. However, when it comes to paying your VAT bill to the government, you can offset the money that you have already paid to them through buying other peoples goods and services and the VAT that they charge you. Let me give you an example.
If for example, you ran a London speed dating company; your main expense may be hiring large halls for the events. You pay VAT on this. Over the year you end up paying out 10,000 in VAT. You charge VAT to the people who attend these dating events. If at the end of the year you end up charging £11,000 in VAT, you would minus the amount you spend and pay the government the difference – i.e. £1,000. If however, you charged your clients less than you spent out the government give you the refund. For example, if that year you didn’t have so many people attend your events, so you only charged a total of £8,000 of VAT but still paid out £10,000 in VAT when hiring venues, the government then will refund you £2,000. In principle it is as simple as this.
The hidden costs and the way it effects you financially are slightly more complex however. The biggest way that smaller companies get hit is they are forced to charge their customers more. The people paying don’t care whether the money is going to the government, or the money is going to the shop owner, they just look at how much they have to pay. It may turn people away.
The other costs involved are the admin fees. The extra work to track it can mount up if you aren’t efficient with your accounting. Also you have to pay an accountant to do the work at the end of the year if you don’t have one in house. If you are small, you can of course do the figures yourself, but remember that your time is money, so you have to take account of the time you spend doing it as part of the expense.
Becoming VAT registered for some people can work out financially beneficial, for most growing companies it is best avoided until the turn over of the company is large enough that you have to.