How or when to register a business for VAT can be a confusing topic, Why? Because HMRC expect you to know the rules, and will punish you when you get them wrong.
Quite harsh when you consider that you are not paid to be an unofficial collector and administrator of taxes.
So when do you apply to become VAT Registered?
You have two options;
1, Compulsory registration, if you provide a service or sell goods that could have VAT added to your retail price, you could wait and register for VAT when you expect to exceed the 12 months sales threshold of £85000 (2017-2018).
2, You could register voluntarily, even before you reach the 12-month sales threshold. (Often a good idea for start-up businesses purchasing assets, stock etc)
What happens if you do not register in time?
The first thing you need to know is that HMRC will not care how you get the money to them? You will be requested to pay HMRC the VAT on invoices from the date you should have been registered, regardless of weather you have charged VAT on these invoices or not! Scary when you think about it, do you contact your client/customer and request the VAT that should have been paid? Or do you take the hit from your working capital! The risks of both of these approaches should be fairly obvious.
What are the pros and cons of voluntarily registering for VAT?
If you become VAT registered can make your business appear bigger than it is which can be very appealing to suppliers, lenders and new clients as they will assume your turnover is above £85k (2017-18)
Business can go back and reclaim VAT on certain goods and assets up to four years prior to registration.
It will allow you to become familiar with the workings of VAT reporting and cash management before you are forced to, although we recommend using a professional team of accountants take care of this for you.
The administration of VAT can be a burden to your business and be quite overwhelming and time-consuming.
Quarterly reporting can expose your business to compliance risk as the rules governing VAT are not the easiest to understand.
VAT rates on sales could affect doing business with clients that are not VAT registered.
Businesses could end up with unnecessary large VAT bills from HMRC if they sell more goods than they can reclaim VAT from when purchasing services/goods from other businesses. This could also affect cashflow if not managed correctly.