08 Mar VAT registration tips for startups
SQK Accountancy offers a variety of professional accounting services for startups, including VAT and PAYE.
When is the right time to register for VAT is one of the most common client queries we address as a small business accountant in Manchester. This is why we’ve put these simple tips together to help any new business make the decision.
When should I register my startup for VAT?
Many potential startups have a faulty impression about VAT, as they tend to think it’s only applicable to successful businesses. Therefore, a new business should not be required to register for VAT returns. Our expert accountants feel this will prove a costly mistake for any startup after it’s traded for a few months.
VAT is a sales tax applied to most products or services sold in the UK. Very few items attract zero or reduced levels of VAT. Even most second-hand products are VATable.
It’s true that you won’t actually need to register your business for VAT until business turnover is in excess of £85,000 (insert link https://www.gov.uk/government/publications/vat-thresholds-remain-unchanged/vat-maintain-thresholds-for-2-years-from-1-april-2020). But, if you think it is likely you’ll achieve this turnover in the first year you may want to consider all the benefits of immediate VAT registration. Even if you sell products or services that are zero VAT-rated you still need to register your business at the point turnover goes over £85,000.
Why would I bother to register for VAT at the point I start up my business?
Your business plan provides an indication of potential growth and cash flow for your new business. So, if you’re projecting a turnover of £85,000 or above in the first year it is wise to register for VAT from the get-go, for the following reasons:
1. Some SMEs and B2B business clients won’t trade with a supplier who isn’t VAT registered
2. If you don’t register for VAT your customers are likely to kick up when you do start charging for it. Of course, many businesses are VAT-registered, so any VAT they pay is contra-charged against the VAT they collect.
3. The customers and clients most likely to be impacted at the point you register for VAT are private consumers. And, you will need to decide whether to increase your charges by 20% in order to maintain existing profit levels, or whether to absorb the 20% charge into your own business profit margins. This can reduce your profits tremendously, particularly for startups trading on very narrow profit margins.
4. Where you decide to absorb VAT charges into your daily business operations, you will need to increase sales by 20% in order to claw back the same amount of cash.
Our accountants feel putting off VAT registration could be a mistake for any UK startup. One more point to bear in mind is the move towards Making Tax Digital. From April 2019 all VAT returns will need to be digital and businesses have to utilise appropriate accounting software.
Get in touch with SQK Accountancy today to find out more about VAT and PAYE requirements for your business, or startup.