When do you start paying VAT

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What is VAT?

Value Added Tax, often referred to as VAT, is a tax added to most products and services sold by VAT-registered businesses. It’s typically paid by the consumer, but is collected by businesses to pass on to the government. Most goods and services are charged at the standard rate of 20%, whereas certain items like home energy are charged at a reduced rate of 5%. Certain goods and services are considered exempt from VAT, such as financial services, property and charity events.

Should you register your business for VAT?

You’ll need to register for VAT if your VAT taxable turnover is over £90,000, or if you expect your taxable turnover to exceed £90,000 in the next 30 days (as of 1st April 2024).

However, you do have the option to register for VAT voluntarily, even if your business doesn’t exceed the current VAT registration threshold. For example, if your customers are predominantly other VAT-registered businesses, any VAT they are charged can be reclaimed from HMRC, so it doesn’t make a difference to your customers if you’re VAT registered or not.

Advantages of being VAT registered

While it’s compulsory for you to register for VAT once your business exceeds an annual turnover of £90,000, there are several advantages to registering for VAT voluntarily. Here are just some potential benefits of being a VAT-registered business:

Reclaiming VAT on your business expenses: You can claim back VAT on items you’ve purchased once you’re VAT registered, as long as they were purely for business purposes. You can even reclaim VAT on goods and services you purchased before you were VAT registered - as long as you bought the goods within the last four years, or up to six months ago for services. Just make sure you have the necessary VAT invoices and that the services or goods you purchased were exclusively for business use.
Improved professional image: Being VAT registered can give your credibility a boost, and improve your reputation to clients and suppliers. It shows that your business is successful and established enough to require VAT registration. Often, businesses prefer not to work with other businesses that aren’t VAT registered as they may view them as too small. When you’re VAT registered, you’ll be given a VAT number that you can display across all your marketing materials to boost your credibility and reputation.
Better cash flow management: If your business charges VAT at the standard rate of 20%, but buys its goods and services at a reduced or zero rate, you could reclaim more VAT than you charge and improve your cash flow.

Disadvantages of paying VAT

While being VAT registered can improve your professional image and boost your cash flow, there are several potential disadvantages for you to bear in mind, including:

Significant admin: To comply with VAT regulations, you need to keep on top of your admin. This includes a lot of record-keeping and regularly submitting your VAT returns, which may feel overwhelming at first. To ensure all your documents are submitted accurately and on time, you may benefit from working with an accountant. They’ll ensure your business handles VAT correctly, meets every deadline and ensures you avoid any penalties or fines.
Impact on your profits and pricing: Charging VAT on goods and services may increase your prices, making your goods or services appear more expensive to customers or clients - especially if they aren’t a VAT-registered business themselves or aren’t able to reclaim VAT.
Unexpected bills: No one likes an unexpected bill, but if your output VAT is higher than the input VAT, you’ll need to pay the difference to HMRC. This could catch you off guard if you aren’t prepared for it.
Cash flow issues: While you can reclaim VAT as a VAT-registered business, there may be a delay between you paying your suppliers and reclaiming VAT. This may cause cash flow problems, especially if you’re a new business on a tighter budget.
Potential penalties: VAT-registered businesses are subject to VAT visits and inspections from time to time, to make sure your business is paying and reclaiming the right amount of tax. Should your business be non-compliant, even accidentally, you may need to pay a penalty.

What are the different tax rates?

Depending on the nature of your business and the products or services you sell, different VAT rates will apply. The standard rate (20%) is applied to most goods and services, but there are other tax rates to be aware of which we’ll cover below.

	Percentage of VAT	Applies to
Standard VAT rate	20%	Most goods and services such as electronics, clothing (except for children’s clothing) and most professional services
Reduced VAT rate	5%	Select group of goods and services such as sanitary products, home energy and children’s car seats
Zero VAT rate	0%	Certain goods and services such as most food, books and newspapers and children’s clothes

How to register for VAT

Registering for VAT should feel fairly straightforward. You can usually register for VAT online, through the government’s website. Certain circumstances may mean you’ll need to register via post, such as if you’re a local authority, parish or district council, or if you’re applying for a ‘registration exception’ because your taxable turnover has temporarily gone over the threshold.

To register online, you’ll need the following information to hand:

If you’re a limited company: You’ll need your company registration number, your business’ bank details, your Unique Taxpayer Reference (UTR) and details of your annual turnover. You’ll also need to provide information about your Corporation Tax, Self Assessment and Pay As You Earn (PAYE).
If you’re an individual or a partnership: You’ll need your National Insurance number, proof of identity such as your passport or driving licence, your bank details, your Unique Taxpayer Reference (UTR) if you have one, and details of your annual turnover. You’ll also need to provide details about your Self Assessment return, payslips and P60.

Take a look at our guide to self employed vs limited company for more information on business taxes.

How long does it take to register for VAT?

Once you’ve completed the VAT registration process, you should receive your VAT certificate within 30 working days. You’ll then receive a 9-digit VAT registration number which you’ll need to include on all invoices you raise. You’ll also receive information about how to set up your business tax account if you don’t already have one, and information about when to submit your first VAT return and payment. You’ll also gain confirmation of your registration date, known as your ‘effective date of registration’. All this information will be sent via post.

As soon as you’re registered for VAT, you must start accounting for VAT.

Can an accountant help with VAT?

Working with an accountant can offer invaluable support and guidance when managing VAT, especially as a new business owner. The rules and regulations around VAT can seem very complicated, and having a financial professional at hand to take care of things can save you time and reduce the chance of errors.

An accountant can keep track of your business’ taxable turnover, making sure you don’t accidentally exceed the VAT threshold. They’ll let you know should you approach this limit so you can plan in advance and register on time if needed. They’ll also help you prepare and submit your VAT returns on time and with accuracy, so you always meet HMRC’s deadlines and avoid any costly penalties.

While having an accountant isn’t a legal requirement for a limited company, working with one can alleviate any worries you may have about financial admin, especially as a new business. For more information, check out our guide to hiring an accountant as a limited company.

Let’s wrap things up

Registering for VAT can feel like a big step and it’s easy to feel overwhelmed by the admin side of things. But being a VAT-registered business shouldn’t be viewed as a negative - it means you’re making significant money as a business, which is certainly a win in our books.

To make life feel that bit easier, develop the habit of keeping records and accounts with the relevant invoices and receipts. That way, you’ll have everything you need to hand when it comes to registering for VAT. Working with an accountant could alleviate any anxieties you have about your business’ financial management. You’ll have a professional at hand who will ensure your business stays tax-compliant and files its VAT returns accurately and on time.

If you’re only just starting out in your entrepreneurial journey and are looking to set up your own business, there’s no better place to start than SUAZ. With us, you can register as a limited company for free. We’re here to help and support you at every stage.