FAQs: Start-up businesses and VAT

When is my UK business obliged to register for VAT, and when would I be registered from?

There are two tests;

  • you expect your VAT taxable turnover to be more than £85,000 in the next 30-day period [registration date is when you realised expected turnover would be more than £85,000 and you need to notify HMRC within 30 days.]
  • your business had a VAT taxable turnover of more than £85,000 over the last 12 months [registration date is the first day of the second month after you go over the threshold and you have to notify HMRC within 30 days of the end of the month when the threshold was exceeded.]

Generally, SME’s will grow and fall into the latter category.

Should I register for VAT even if my turnover is not yet at the threshold for mandatory registration (a ‘voluntary registration’)?

Like most VAT questions, it depends!  You should consider the following factors;

  • If most of your customers are consumers, by registering voluntarily early you are simply adding VAT to your prices and potentially damaging customer / turnover.
  • If most of your supplies are to VAT-registered business who can recover VAT charged, your prices are not VAT-sensitive so registration may help and add credibility to the business.
  • Have you incurred significant sums of VAT on start up costs?  If reclaiming that VAT will really help your business cashflow, there could be an advantage in registering ‘early’ to access that claim (but see next question).   

What VAT can I reclaim on expenditure?

‘Input VAT’ on expenditure can be reclaimed if it relates to taxable business activities.  In addition, VAT incurred prior to registration can be reclaimed in the following circumstances;

  • Goods on hand at registration which were bought in the 4 years prior to the date of registration.
  • Services received in the 6 months prior to the date of registration.
  • Pre-incorporation VAT, providedit relates to the new company, the person who incurred the costs becomes a shareholder, director or employee of the new company and the individual is fully reimbursed by the company.

Are there any special schemes that will help start-ups?

There are a number of schemes that may help;

  • Cash accounting scheme – VAT on sales is only payable to HMRC when you get paid (for annual turnover up to £1.35m).  Similarly VAT on expenditure can only be claimed when paid out. Can be adopted without advising HMRC.
  • Annual Accounting – this allows you to submit only one annual VAT return and make fixed monthly payments to account for VAT due – which can help with budgeting.  HMRC application required.
  • Flat Rate Scheme – this simplification model requires businesses to pay a fixed rate of VAT based on supplies made and the nature of business activities.  You’ll get a 1% discount for the first year of your VAT registration.  You keep the difference between the VAT you charge customers and pay over to HMRC.  You cannot reclaim VAT on expenditure, except for certain capital assets over £2,000.  Available where annual turnover is £150,000 or less (excl VAT). HMRC application required.

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