For substantial business decisions, most entrepreneurs have to rethink the idea a thousand times before coming to a choice. The same goes for the resolution of registering your establishment for value-added tax. As your sales start to grow, it is ideal to begin contemplating if VAT registration will benefit your business.
In the last 12 months, if your taxable turnover or sales had reached the VAT threshold, which is £82,000 in the UK, then you are mandated by law to register your business for VAT. But if not, then the choice is wholly up to you.
Here are the basics to keep you well-informed on all things VAT-related.
What Is Value-Added Tax?
Value-added tax, also known as goods and services tax (GST), is a consumption tax placed on products and services at every point of sale—from its initial production to its final retail purchase.
It is an invoiced-based system where tax is collected at every point of an item’s production process, which makes it different from the national sales tax, where the only payor would be the retail customer. As of today, 160 countries adopted this kind of taxation law, Europe being the predominant one.
How Does It Work – Vat Registration?
Currently, the UK’s standard rate is 20%. It means that 20% of a purchased item’s price goes to the government. However, there are several exemptions to the rule, such as:
- Exempt supplies include financial services, insurance, education and training, and charity-hosted fundraising.
- Zero-rated goods include food, prescription, and child-related items such as clothing and books.
- Reduced rate services include fuel and power used by homes and charities. The current reduced rate is 5 per cent.
- Outside the scope are those related to education, wages, and MOT tests
VAT-registered businesses get to charge their customers the applicable percentage for all the goods and services they offer. In return, the company will also pay the appropriate value-added tax for every purchase it makes to VAT-registered establishments. The upside is you can get a refund from the HMRC (UK) if your input tax is higher than the consumer value-added tax.
Aside from repayments, VAT registration has its own set of perks such as:
- It makes your company look more reputable and financially secure. Being VAT-registered means you have a sizable amount of annual turnover, making you a competitive brand among your non-registered competitors.
- Some quality suppliers and companies only do business with fellow VAT-registered folks.
- Your company gets to recover any value-added charge you have paid, whether it is from a VAT-registered client or customer.
However, all decisions have their own set of disadvantages. If your turnover is nowhere near the threshold, then enjoy the remaining tax-free years you have left. Carefully weigh its pros and cons before entering the messy world of taxation. With value-added tax, some drawbacks include:
- Having to pay more to HMRC when the consumer VAT is higher than the value-added tax you paid to your supplier.
- Adding tons of workload that your company is not capable of doing. Since the government levies VAT, its registration requires a lot of paperwork, time, and effort that could have been used instead to focus on critical business matters.
- Being registered means you now need to increase your retail prices, causing frequent customers and clients to think that it is an organic price hike.
Before You Leave …
Another important consideration is the type of VAT scheme that is suitable for your business. There are several choices available for firms depending on their business size, amount of turnover, and reclaiming system of choice. Big decisions require significant risks. It requires you to have a firm understanding of your finances and the current needs of your company. If you would like professional input on this matter, don’t hesitate to reach out! Or you can follow us from one of our social media where you can dm us as well!