Should a new business register for VAT? – The Pros and Cons

It is a legal requirement for every business to be VAT registered if their turnover is over £85,000 or
likely to be over £85,000. The question is therefore, what are the advantages and disadvantages for
a new business to voluntarily register for VAT if their turnover is less than £85,000.

The pros

You can apply VAT to almost any product or service that you buy or sell. If you sell more than you
buy, you will have taken the VAT money in and can put the positive difference to one side for
payment when it falls due. If however you buy more than you sell, you can reclaim the difference.
This is particularly advantageous when setting up if you have had to purchase equipment, office
supplies or products before you are able to start selling. Companies can also backdate their VAT
registration for up to four years and claim on equipment they are currently using, subject to
supplying firm evidence to HMRC.

Being VAT registered can be seen as a sound marketing tactic as it implies that the company is of a
reasonable size and has a decent turnover. The VAT registration number can be displayed on
invoices and letterheads giving additional credibility.

The Cons

If you generate more VAT from the products and services you sell than you can claim back from the
products and services you buy, then you will end up with a bill from HMRC for the difference. You
are required by law to keep accurate, up to date records of all your invoices, both in and out. You
will also need to file VAT returns to HMRC every three months, with any necessary payments. This
will result in additional administrative costs. It’s also worth bearing in mind that you could be
subject to a random VAT inspection at any time. This can be a very stressful experience.

If you are registered, you will have to apply VAT to all your sales invoices and it could be that some
of your customers are also small and if they are not registered, may be unable to afford or unwilling
to pay your charges and decide to use a supplier that does not charge VAT. This could lead to an
unnecessary loss of income.

There is a lot at stake in your first year of business and it would be advisable to seek the advice of
your accountant before making the decision on whether to register or VAT. Contact Jason on 07921 506051 or complete the form below and we can contact you.