Last Thursday, 28 May, I had the privilege of being the ‘expert’ on the receiving end of questions on my specialist subject. This was the first online Chat organised by Better Networking for anyone to take part in. Being the first event it was, perhaps, not surprising that there were not many attendees or questions asked. The event was I think a success. So much so that I have agreed to take part in the future.

Let’s have a look at the questions that were asked, and the answers given – which I may expand upon in the course of writing this blog.

Question 1: I'd like to know if it's worth considering registering even when far from needing to (turnover-wise) - so that the VAT can be reclaimed on purchases.  For someone that is happy doing the returns with relative ease.

Answer: The decision to register before you reach the registration limit is one only you can answer. My advice is that if you will be getting back enough VAT on your expenses to cover the cost of paying someone else to do the paperwork, it's probably a reasonable idea.

Let me expand on that: the idea that you should be recovering enough VAT on expenses to cover costs is only a rough rule of thumb idea. There is no scientific basis for the idea. There are other considerations that need to be considered, e.g. whether your customers are mainly businesses. If your customers are mainly consumers it may be better to remain unregistered for VAT as being registered means either increasing your prices, or potentially reducing your profits. It is necessary to consider all the different possible factors that might impact upon your businesses profitability. Do your overheads bear VAT? Do the overheads make up a large part of the costs you incur, and thus the price you charge for your products?

If you are making and supplying goods to customers you may be spending a lot on materials that go into the manufacturing process. You need to decide whether getting the VAT back on these costs will compensate for either having to add VAT to your charges, or if the market won’t tolerate a price increase, taking it out of your profit margin. Currently, with VAT at 15%, you would be losing about 13% of income in VAT, i.e. out of every £100 of income you’d have to pay the VAT man about £13. If half the costs are materials and overheads on which you incur VAT then you would be able to recover about £6.50, reducing the VAT due to H M Revenue & Customs (HMRC) to 6.5% of your turnover.

If only it was that easy! Every case depends on its own circumstances, and it is impossible to give a one-size-fits-all answer. For example, if all you sell is zero-rated for VAT, but you incur VAT on your overheads it’s a no brainer: you register because the VAT you get back goes straight into your bottom line.

There are all sorts of other things to take need to be taken into account, and that you need to know about – or to ask someone that knows about them – before you make a final decision on being VAT registered.

Question: Are there any circumstances in which you would advise a company running well below the VAT registration threshold, which I believe is £67,000, to deregister.

Answer: To answer this question, I think I'll just repeat what I said in answer to the first! Almost. One has to weigh the hassle of being registered against the potential benefits. If the business is only making zero-rated supplies, i.e. charging VAT at 0%, I'd say they should stay registered until the amount of VAT recovered falls below what it would cost to pay someone to do the paperwork.

Supplemental question: what is the point of being registered though, is it not more hassle than its worth?

Answer: The situation’s a little different for a business that's charging VAT at the standard rate - 15% - as it has different criteria to consider. A business that is charging VAT may be better off deregistering and not reducing its prices, so increasing its profit margin which will be worth more than the VAT on expenses it would recover (or should be!).

Adding a little more comment: each business’s circumstances will be different and each needs to consider all the criteria that affect it before making the final decision.

Question: Is there a point at which on has to be legally registered? or can you just continue not to charge, VAT?  I am just starting out.

Answer: to answer your last question first, yes you have to be VAT registered if you go over the registration limit - currently £68,000 per 12 months.

On your first question, whether it's too much hassle only you can decide, but you have to register at some point if your business expands so that turnover is high enough. It could be seen as a measure of your success...

Adding a bit more meat to the bones: the registration rules are reasonably easy to understand. If your business has taxable (VATable) income of more than £68,000 in the last 12 months you have to tell HMRC. For example, if at the end of May your taxable turnover is £70,000 for the last 12 months, you have to tell HMRC by 30 June. Your VAT registration would start on 1 July – that’s the date from which you have to start charging VAT. There is one exception, if you know that in the next thirty days you will make taxable supplies that are valued at more than the registration limit, you will have to notify HMRC within thirty days, and your VAT registration starts immediately, i.e. you start charging VAT immediately.

The hardest part in this process is knowing what is taxable turnover. Taxable turnover is the income on which you would charge VAT at either 0%, 5% or 15%. How do you find out what this is? You’ll need to ask either HMRC, using its website or its Nation Advice Service, or a professional adviser.

Question: I want to license a play I have written for amateur/professional groups to perform it. My business partnership is VAT registered, so presumably HMRC will want any further business activity to be channelled through the partnership and VAT applied where necessary. Off the top of your head, do you know if I will have to add VAT to a license?

Answer: The answer is yes where the license is granted to anyone in the UK. Royalties need careful attention when you are deciding the right VAT treatment, particularly where the purchaser is overseas.

I’m going to save any additional comments on Royalties/licences for a later post.

If you have any questions on the points raised in this blog, please leave a comment and I’ll respond, or contact me direct using e-mail. Or you can of course visit my group on Better Networking: vatark for help with VAT