Should I register my business for VAT?

Q: I have recently started work as a self-employed plumber and wonder if I should be VAT registered?

A: If your turnover is likely to exceed the compulsory registration threshold of £79,000 in the next 30 days or has done so in the last 12 months then you must register. It’s important to note that this is on a rolling 12 months basis, not based on a calendar year. If you haven’t exceeded the threshold you can still register voluntarily.

How does VAT work? If you’re registered you have to add VAT at the appropriate rate to everything you sell (usually 20 per cent). This income isn’t yours – you’re collecting it on behalf of HMRC. Every three months you pay over the VAT collected to HMRC. When you buy items from another registered business they have to charge you VAT, but you can claim this back.

Why would I want to register? It may be that you are able to recover more VAT than you have to charge, especially if your customers are VAT registered and can recover it.

So why would I not want to register for VAT? The most often cited reason is paperwork, however it may also cost you money. Imagine your customers aren’t registered – you currently buy material for £7 (including £1.04 VAT) and sell them for £10, making £3 profit. If registered you can claim that £1.04 back and make £4.04. But if VAT registered you have to charge it on everything you sell. If you add VAT to your price of £10, then you’ll be selling at £11.75. If your customers are not registered then the extra £1.75 has to come out of their pocket, and they may go elsewhere. You could absorb the VAT – ie, still sell at £10, but have that has the VAT inclusive price (£8.51 + £1.49 VAT), but would be making less profit than before.

So should I register? If you sell mainly to non-VAT registered businesses/people, then perhaps not. If you sell mainly to VAT registered businesses then you probably should.