A startup and small business VAT planning strategy

Finance Calculations

A startup and small business VAT planning strategy

If you’re planning a startup or already running a small business, VAT and registering for VAT will be a major consideration. This is particularly the case if you’re close to reaching the VAT threshold or know your startup will go over this limit in the first year of trading.

What does it mean to be VAT registered?

Once you are registered for VAT with HMRC you will be obliged to charge it on all qualifying goods or services provided. VAT registration also allows you to claim back VAT paid on qualifying business purchases. The VAT threshold is currently based on a business turnover of £85,000 (2019). Registering for VAT on a voluntary basis can provide some benefits to businesses that are below the threshold, and this is discussed below.

Registering for VAT on a voluntary basis

One of the principal benefits of voluntary VAT registration relates to businesses that sell zero-rated goods. In a situation of this nature, all VAT paid out can be reclaimed, which will reduce operational costs considerably.

If you supply goods or services that are standard-rated, registering for VAT can also be advantageous. This is particularly the case if your customers are generally VAT-registered as it enables them to reclaim VAT charged.

Can I claim back VAT on my startup costs?

It is often possible to reclaim VAT on purchases made prior to registering your business for VAT. You may be entitled to claim the VAT element on purchases made in the past four years, but must be able to evidence accurate record-keeping to do this.

What happens after I register for VAT?

It may take weeks for HMRC to process your VAT registration, however, you must charge VAT from the date of application. You won’t be able to show the VAT on invoices until you receive your official VAT registration number, but will need to raise sales prices accordingly. Your first VAT return will include all sales from the date of registration. It will be important to explain to customers the reason for the 20% hike in your prices, and when your official VAT registration number is received you will need to issue official VAT invoices. This allows your customers to reclaim the VAT they paid, if relevant.

I don’t expect my turnover to remain over £85,000

If you can prove to HMRC that business turnover has only risen above £85,000 for a short, temporary period of time, you may be able to request an exemption from registration. It’s also possible to de-register if your taxable business turnover falls below threshold limits.

Can I avoid registering for VAT?

You cannot legally avoid registering for VAT by trying to split your main business into several smaller businesses with a turnover that is lower than the VAT threshold.

In addition, if you buy a business that’s already registered for VAT and the total combined profits for all your businesses then take you above the VAT threshold, you will need to register your existing businesses. If you are planning to buy a new business, it might be worthwhile talking to a VAT and tax specialist beforehand.

Digital VAT returns

One final important note is that digital VAT returns are now a legal requirement. You can find out more in our recent post.

If you are a small business in Manchester and would like more information about registering your business for VAT, don’t hesitate to get in touch with us!

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