When you register for VAT, you need to charge your customers VAT and then send that portion of the sale to HMRC. You can also claim back VAT from anything you buy that you’ve paid VAT on.
That is the simple explanation, but of course, things do go a little deeper than that. Let’s say you are not registered for VAT at present, but you will reach the threshold in a few months time. Let’s also say you charge £100 for your services now, to keep things nice and simple. If you become registered for VAT, you would need to add 20% to your charge. That would mean charging customers £120 – an increase of £20.
Now, while you would need to do this to be compliant with VAT rules, your customers may have an issue with it. For example, some won’t want to pay the extra. The way they see it, their bill has just gone up by a significant amount. The reaction from customers would probably depend on whether they are a business customer or a personal customer. Many (although not all) business customers will be VAT registered themselves. That means they can claim back that additional £20 when they complete their next VAT return – provided you have given them a VAT invoice. And of course, you should have done because it is part of the process of being compliant.
But if your customers are private people, i.e. individuals rather than businesses, they won’t be able to do this. So, you might experience some people deciding to go elsewhere to find someone cheaper. That is something you cannot do much about. Having said that, there is one thing you could do. That would be to drop your prices. It’s not going to be good for you to do this, because you will see your profits fall, while still needing to comply with all the VAT records and returns you’ll need to fill in. So, you will essentially be doing more work for less money.
Hence why some people with their own businesses end up making sure they stay just under the threshold, so they don’t need to worry about any of this. The threshold is currently quite high, although we can never be certain it will remain at that level. Although of course, if things changed and the level dropped by a significant amount, lots of business people would be in the same position, and many customers would need to accept that paying VAT is part of buying goods and services.
So, you see there are several elements to think about here. How would you react if you got close to the threshold for your business? Would you go over it or make sure you stayed just shy of it?