The threshold for being legally required to pay VAT is £79,000. This means if you know your earnings are likely to go above this you will need to register to pay the tax. However, things get a little more complex if you know you won’t earn that much. Bear in mind here that we’re talking about turnover. If your turnover will be £79,000 or more – even if you don’t make a profit out of that amount for the first year or more – you have to register. Some people confuse turnover with profit and thus get caught out by not registering soon enough.
In short, if you know you will fall into this bracket the question is answered for you already. But what happens if you know your turnover is likely to be a lot less than this, at least to begin with?
In this case the registration is optional. Some people choose not to register until they have to, purely to save on paperwork. After all, if you are starting up a new business you have enough to think about and do without figuring out the ins and outs of VAT as well.
However some people do opt to register voluntarily. There are some benefits to this, namely that you can claim back the VAT you pay on a variety of expenses. This can save you money, particularly when you consider the early stages of your business and the amount of equipment and supplies you may have to buy. It’s worth thinking about this if you haven’t yet got your business up and running. You could do some sums to see how much VAT you could potentially claim back at this stage.
Of course you will also have to charge VAT if you do register for it this early. The current rate is 20% so if you create a product for £10 you will have to charge £12 for it, as this will include the cost of VAT. A lot depends on whether your business deals with clients who are VAT registered and can therefore claim that amount back themselves.
As you can see you shouldn’t make any kneejerk decisions on what to do. Take some time to think it over if you know you will be way below the obligatory threshold for registration. Remember, you can always get your business started and then consider whether or not to register later on once everything is up and running. If you’re below the threshold you have that possibility to consider. Sometimes the most important thing is to get started and worry about things like this – things that are optional in your case – later on.