There are a thousand different things you need to focus on when you are thinking of starting up a new business. VAT would seem to be the least of them, since you may not be anywhere near earning the amount required to have to register by law.
But in truth some people do think about VAT, even at this early stage. Some businesses have to, because they are going to be big enough that their turnover will reach that threshold as soon as they get started.
What about other businesses though? Let’s say for example that your own projected annual turnover in your first year is something like £15,000. Now that is less than a quarter of the limit you will need to reach in order to register by law. So why on earth would you want to register if you don’t have to?
Well, to discover the answer we need to look at the situation in more depth. Some people do it as a mere status exercise. There is a very real assumption that if a company is VAT registered, then they must be earning over the threshold required to pay VAT. But as we have just learned this is not the case. With people who do make these kinds of assumptions it is generally the case that they will go for a company who is VAT registered as opposed to one that isn’t.
But there are other benefits too. A lot will depend on what it is you sell, because there are several different types of VAT ratings that apply to goods. If it turns out that the goods you sell have the reduced rate (or are even exempt completely) then you will find it advantageous to apply for that rating.
This is because you will still be able to claim for the full rate of VAT on other items that you buy. Let’s say for example that you sell books. These are exempt from VAT altogether. But you will probably have to buy all kinds of other things to keep your business running, and in this case you will find that you will be able to claim more VAT back than you will be paying.
In other words, you will charge 0% VAT but still be able to claim back 17.5% VAT on other things you have bought for business purposes. That means the government will actually be paying you money! You can find out more about this aspect of voluntary registration at this link. You’ll notice that downloadable forms are also available on this web page, so you can read more about what situation demands what action.
So you see, while it might initially seem daft to register for VAT if you don’t have to, it is worth evaluating your situation carefully before you make any decisions. You must be prepared to handle the paperwork in any case, but that becomes easier with practice. Don’t let it put you off potentially claiming back more than you charge.