There are many misconceptions, amongst new business owners, as to when we should register for VAT. There is, however, no legal requirement to do so, until the business turnover exceeds the registration threshold (currently £67,000) though this is applied on a pro rata basis.
In other words, if turnover in a three month period exceeds £17,000, and it is likely that it will continue to do so, then registration is required immediately.
It is possible to register for VAT voluntarily, even if you are below the Registration Threshold.
Reasons we might want to would include:
* In order to reclaim the VAT incurred on large initial capital outlays at business start up. (Equipment, vans etc).
* To reclaim VAT on ongoing purchases and expenses, thereby making them 17.5% cheaper. (although we should be wary if we are mainly selling to the public).
* To improve company image. If a company is not registered for VAT, then any potential large customers will realise that its turnover is below £67,000, and may refuse to deal with such a small company, on the grounds that its continuity cannot be assured. This will be a potential issue for any of us working from home.
When considering voluntary registration, you need to be aware of who your customers are. If we are dealing mostly with business customers, then they will, in the main, be able to reclaim any VAT that we charge on our products and services.
If, on the other hand, we mainly deal with the public, they are unable to make such a reclaim and our goods and services immediately become 17.5% more expensive. Alternatively, we can make our current prices VAT inclusive, and lose out on the extra profit. Either way, this will be a major factor in choosing whether or not to register for VAT before we actually need to.