Do you need to register for VAT?  This is a question many directors of companies ask themselves.  The whole concept of VAT can be a little tricky to understand especially as some goods don’t incur VAT at all.

How much do you need to earn before you must register for VAT?

If your company had a turnover of £82,000 or more in the previous 12 months then you must register for VAT. If you haven’t earned that amount, you can still register and you could be better off.

How does VAT work?

When you buy goods and services, VAT is usually included within the price. When you buy something from another company you will should see a line for VAT on their invoice.  The amount is 20% of the price of the goods which is added to the bill.  If you’re a VAT registered business, then you too will add 20% to your invoices.  However this 20% on your invoices isn’t yours, you are collecting it on behalf of HMRC.  Every three months you need to pay over the VAT you’ve collected to HMRC.

When you buy items from another VAT registered business – they have to charge you VAT. But you can claim this back.

Could you be better off if you register for VAT?

You could be better off if you register for VAT depending on how many purchases you are making and how much income you are receiving.  Assuming that in a 3 month period you collect £1,000 in VAT from your customers. In the same period you also buy something from a supplier and you’re charged £200 + VAT (Total: £240).

The amount you have to give to HMRC is the VAT you’ve collected (often called “Output VAT”) minus the VAT you’ve paid out (“Input VAT”). So in this example you’ll be handing over £960 (1000 minus 40).

You’re essentially £40 better off than you would have been if you weren’t VAT registered.

What do you need to do if you register for VAT?

If you register for VAT you need to pay the VAT every quarter.  You must do this on time and you must pay the full amount.  You need to register for VAT online and you fill in the amounts you have collected and paid out online.  HMRC will then work out how much is owed to you, or how much you owe them.  Contact us for a free consultation on how we can help you with getting set up with VAT.

Let’s Talk

Watermill Accounting Limited,

Future Business Centre, Kings Hedges Road,

Cambridge, CB4 2HY

01223 781290

da@watermillaccounting.co.uk