Going VAT registered

When you have to register

Registration is compulsory once your VAT taxable turnover passes the threshold in any rolling twelve month period. That is the part people miss: it is a rolling window, not your financial year, so a strong summer can trigger it in October.

You must also register if you expect to pass the threshold within the next thirty days alone, for example because of a single large contract.

You can register voluntarily below the threshold. That makes sense when your customers are mostly VAT registered businesses who reclaim it anyway, and when you buy a lot of materials whose VAT you could be reclaiming.

It rarely makes sense voluntarily when your customers are consumers, because you cannot pass it on without either raising prices or absorbing it.

What it does to a consumer-facing business

This is the hard part and it deserves plain speaking. If you charge the public £45 for a service and you register, you have two options and neither is free.

Raise your price to £54 and keep your margin, which is a twenty per cent increase your customers will notice.

Or hold the price at £45, in which case £7.50 of it is now VAT and your income from that appointment has dropped to £37.50.

Most businesses do something in between and take a real hit for a period. Knowing this is coming is the reason to plan for the threshold well before you reach it rather than discovering it in a letter.

You do get to reclaim VAT on what you buy, which softens it if you carry a lot of stock or materials. For a business whose main cost is labour, that relief is small.

The Flat Rate Scheme

Smaller businesses can use a simplified scheme where you pay a fixed percentage of your gross turnover rather than accounting for VAT on every transaction, and generally do not reclaim VAT on purchases.

The percentage depends on your trade, and there is a lower rate in the first year of registration.

It can work well for labour-heavy service businesses with few costs to reclaim against, and badly for anyone buying a lot of stock. There is also a limited cost trader rule that catches businesses spending very little on goods, which pushes them to a higher rate.

This is exactly the sort of decision to put to an accountant with your actual numbers rather than to work out from a blog.

Making Tax Digital

VAT registered businesses must keep digital records and file returns through compatible software. A spreadsheet you retype into a form is not compliant.

Practically, this means whatever runs your bookings and invoicing needs to produce figures your accountant or filing software can use, with deposits recorded separately from final payments.

Get this in place before you register rather than after. Trying to reconstruct a quarter of transactions retrospectively is a miserable weekend.