When you're self-employed, tax can be a worrying issue. Knowing when to pay tax and how much you need to pay can be baffling. Does your small business need to register for VAT and if so, what is the VAT threshold?
Hugh Williams, expert accountant and author of Lawpack's Self-Employment Kit and Limited Company Formation Kit, outlines when, and why, you should register for VAT.
The admin of registering for VAT
Before I explain the pros and cons of voluntary VAT registration, you have to ask yourself: "Am I prepared to take on the responsibility of writing up my accounting records in accordance with certain legal standards, and doing so every quarter?"
If you're the kind of person who finds administration, filing and bookwork a chore, you probably shouldn't register for VAT as it will become an extra problem for you.
Do, remember, though, that you could avoid the burdensome administration of VAT registration by employing an accountant to prepare the VAT Returns, but, of course, this will cost you extra money.
If you're unsure about your answer to this question, I should emphasise that there are thousands of UK traders who register for VAT and, when you consider that many are self-employed running small businesses and have no training in book-keeping, it's obvious that keeping VAT records properly isn't an insuperable task.
If you're prepared to learn the simple VAT accounting rules and stick to them, then you can easily register for VAT.
But if your turnover is above the annual VAT threshold (£70,000 is the 2010/11 figure), then you don't have any choice in registering for VAT. VAT registration is compulsory in your case.
What is the benefit of registering for VAT?
The advantage of VAT registration is that you can reclaim VAT on most business purchases. If you're not registered for VAT, then no reclaim can be made.
What is the possible disadvantage of registering for VAT?
The problem with VAT registration is that you have to add VAT to all your VAT-able sales. This means that all such sales are automatically more expensive than they would be if you were not VAT-registered.
This might put you at a disadvantage against your competitors if they haven't registered for VAT. But if your customers themselves are registered for VAT (i.e. if you're dealing with other businesses rather than the public), they will, in turn, be able to reclaim any VAT that you charge. So this would not disadvantage your business.
If you feel that you're prepared to treat VAT registration with the due respect that it requires, and that your sales will not suffer unduly as a result, then you should consider registering for VAT.
If your business is one that will attract a regular refund of VAT, you’ll be offered the chance of receiving your repayment monthly and not quarterly. Unless the sums are considerable (i.e. more than £500 a month), you're advised to resist monthly VAT Returns because attending to them monthly, rather than quarterly, can become a nuisance.
When you register for VAT, you may also apply to fill in just one annual VAT Return and pay your VAT over nine months with a balancing payment at the end.
How do I register for VAT?
The easiest way to register for VAT is to do it online at www.hmrc.gov.uk. Go to the VAT page on the website where there is an online VAT registration service. Alternatively, you can contact your local HMRC office and arrange for an application form to be sent to you.
More expert guidance from Hugh can be found in Lawpack’s Self-Employment Kit, where he outlines the day-to-day practicalities of being self-employed. He also has written two tax books, 101 Ways to Pay Less Tax and Tax Answers at a Glance, which are full of tax-saving tips and guidance as to the taxes involved in running your own business.
Published on: September 6, 2010