Services:
VAT & Customs Duty
When founding a new startup, many owners will assume there’s an automatic need to get registered for value-added tax (VAT). Becoming VAT registered seems like the grown-up and common sense thing to do, and it can be a step towards making your fledgling business appear more stable and professional in the marketplace.
But do you really HAVE to get VAT registered? And is the whole process actually worthwhile? Here we explain why it’s better for a new startup to NOT get registered for VAT, in the first instance, and why it could be more trouble than it’s worth.
Why would you register for VAT if you don’t need to?
It’s a valid question and one that comes up a lot when I’m talking to new clients, especially newly incorporated businesses. New founders want to know why VAT registration is necessary and, increasingly, I’ve begun to question whether the positives of registering are enough to outweigh the potential negatives.
I deal with a lot of non-resident and overseas clients, and in many European Union (EU) countries you MUST register for VAT – it’s compulsory if you set up a limited company. But in the UK it’s not mandatory to register for VAT when you incorporate.
Once you reach the VAT threshold, registration is required, but at the early stages of the business, when turnover is low, you have the option of holding off on registration until you’re truly ready. You don’t need to register immediately unless it’s actually beneficial for the business.
Are there benefits to being VAT registered?
Many EU countries have a zero threshold for registration. In the UK, the VAT threshold is quite high – £85,000 turnover at present – so it’s possible to trade, keep turnover low, stay under the threshold and opt out of the VAT registration process entirely. ‘What would be a good reason to register?’ is the other question I’m usually asked by clients, and I do have to be honest with them.
There are some specific positives of being a VAT registered business, but there are a few negatives too and you need to weigh up whether these positives are actually important to your startup at this point in time. The key benefits of being VAT registered include:
1. Increased cashflow
Better cashflow is the one big benefit of being VAT registered. Once registered, you can claim back your VAT costs. If your set-up costs are high and include a VAT element, claiming that back can make a huge difference. You might be buying lots of stock, or investing in IT, building an expensive website, or even hiring professional advisers or consultants. Recouping those costs can be a lifeline.
2. Credibility in the marketplace
Being VAT registered makes you look professional; that’s the perception. VAT registered businesses appear to have more credibility in the market and people will assume that your startup is bigger than it is and has been around for longer – all perceptions that may help you get a foothold with potential customers.
3. Winning more work
If you’re a business-to-business (B2B) startup that’s aiming to trade with large corporations, they may well dismiss suppliers that aren’t VAT registered. VAT registration could give you an edge when applying for a tender. Companies that don’t have VAT registration can be a bit of a warning bell in the big corporate market and it could lose you work. Potential clients want to know that you’re reliable and stable, after all.
What are the downsides of VAT registration?
Those are the positives, and it sounds pretty attractive, right? But to get these benefits means collecting VAT from your customers on an ongoing basis, filing a quarterly VAT return to claim back your own VAT costs, while paying HMRC the VAT you’ve collected from your customers. This can be tedious and time-consuming, but also highly complex for certain businesses and sectors.
So, what are the negatives of becoming VAT-registered? Once you start looking into it, there are quite a few which could impact your decision. Important negatives to think about include:
1. Your prices increase
Once you’re VAT registered, the VAT is being passed on to your customers when you send out a VAT invoice. If you’re selling to consumers (B2C) then you’re suddenly 20% more expensive than you were before.. If you’re a plumber that deals mostly with direct consumers, you won’t win much work if you’re 20% more costly than the next plumber down on Google. Most business clients will know to claim back their VAT element, but these higher prices can sometimes be an issue in certain circumstances.
2. The VAT process can get very complex
One of the negatives for a new startup is definitely the complexity of the system. The rules can be simple in some sectors, like financial services, but some sectors can be highly complex, like manufacturing and import/export where you’re crossing borders and attracting VAT in multiple jurisdictions.
3. Your customers’ sector may be VAT exempt
You might be trading in an industry that’s VAT exempt – healthcare and property being the main ones this applies to. You don’t want to be charging VAT to B2B clients in these sectors as they won’t be able to claim it back. Think about your customer base and the industries you work in before you make the VAT decision.
4. Not claiming the VAT you’re due
Due to the complexity of the process, there are lots of ways of missing out on VAT you’re due. It’s very easy for VAT claims to fall through the cracks.
5. You’ll need to pay a VAT specialist
If you register and you’re not an accounting professional, you will have to pay an adviser to take care of this. If you have £10,000 costs and £2,000 in VAT costs you could potentially claim, that’s probably the minimum for considering going through the registration process and engaging an adviser.
6. You could end up paying penalties
HM Revenue & Customs (HMRC) only gives you a month and seven days to file your VAT, and only a month and seven days to pay it. There’s a strong penalty regime if you’re late with payment, or can’t pay. The more often you file late , the bigger the surcharges get, so if you get behind, that can spiral out of control and get very expensive.
Filling out that VAT registration form doesn’t sound like such a good idea now, does it? And that’s pretty much my point. It’s undeniable that there are certain benefits of being a VAT-registered company, but it’s not something you need to dive into feet first.
Should you register for VAT?
The VAT rules and rates do change on an ongoing basis – things like the drop from 20% to 5% VAT on food in restaurants is a current example. The VAT rate is likely to go up in the coming years to pay for the enormous amount of Coronavirus financial support the government has paid out.
It’s important that when VAT rates do change, you process this internally, and charge customers the right rate. If you do it wrong, that’s fraud – and you’ll end up in hot water! Talk to an adviser before you make any decision about getting VAT-registered and get some solid advice on the pros and cons.
I know of many companies that have incorporated and automatically registered when there was no real positive to doing this. It’s fairly rare for VAT-registration to be a good idea on ‘Day One’ of the business. Dip a toe in the water, see what happens and if you do get the trade you’re aiming for then go ahead with your VAT plans. In a nutshell, it’s about working out whether you’re truly getting a positive for the business from becoming VAT-registered. And if you’re not, you’re under no pressure to do it.
Ultimately, it’s your choice whether you get registered, until you hit the £85k threshold and must complete the mandatory registration. So, make your decision wisely, keep an eye on your business performance and use VAT as a positive, not a negative drain on time and resources.
If you’re an early stage startup, come and talk to us about your growth plans.
