Should you register for VAT before you need to?

This is always a big question for many small businesses, or even start up’s who are debating becoming VAT registered from the start. The overarching answer is that it depends on who your customer is.

Businesses usually are either B2C (Business to Consumer) or B2B (Business to Business) and depending on which one you are depends on what you should do.

If you are a B2C business, the answer is a resounding no. Being VAT registered will make you 20% more expensive to someone who can’t reclaim the VAT. In this situation, we would only recommend becoming VAT registered when your turnover reaches £85,000.

If you are B2B, then the answer is once again it depends. We would usually recommend it for businesses who are growing or trading with large VAT registered businesses. If you are happy with the level you are at, not looking to grow and below the £85,000 threshold, then no, you don’t need to register.

If you do volunteer to be VAT registered, one of the main benefits will be that you will be hiding your turnover and therefore give the impression to the outside world that you are larger than you are. This is a great growth tool as it does give the impression of a stable and successful business and, as we know, success breeds success. Being VAT registered also can attract larger sized businesses – some large businesses will not trade with you unless you are VAT registered. This perception can take a business years to create and you can fast-track this by volunteering.

If you are looking to volunteer, you need to consider which scheme will work best for you:

  • logo Flat rate scheme

  • logo Cash Accounting

  • logo Accrual Basis

  • logo Annual Accounting

Each scheme has its pro’s and con’s and it’s really important that you talk to your accountant before deciding which one is best for you.

In summary:

  • logo If you trade B2C: No

  • logo B2B looking for growth: Yes

  • logo B2B not looking to grow: No

  • logo If you’re looking to attract larger clients: Yes

Remember to save ALL VAT charged and received from customers in a separate reserve account as it’s not your money. This way you will always be able to pay your VAT return as the penalties are really hefty for late returns and/or non-payment.

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