Company Formation and VAT Registration

When you start a new business you are not obliged to register for VAT. You only have to do this when your taxable sales in a twelve month period is expected to exceed the vat registration threshold. The level of the threshold changes each year and the latest figure can be found on this website and online at HMRC. Otherwise you are free to decide whether or not registering for VAT is the best option for your company.

In the course of registering limited companies Simple Formations are often asked if VAT registration is automatic. It isn’t. You need to register with HMRC yourself or through a tax advisor or accountant if you have contracted one.

If you don’t register when you meet the criteria you can then be fined. Keep a close eye on your turnover and if it starts to get close, get registered. If you haven’t exceeded the threshold for compulsory registration you can still register voluntarily if it makes sense for your company. If you do decide to register for VAT, you should be aware that there are a number of schemes available. These are the 3 most popular.

Standard (or Accrual) Scheme
On the standard scheme, the amount of VAT you owe (or reclaim) is based on the date of invoices. So if you invoice someone for £1,000 + VAT the VAT is deemed to be owed to HMRC at the end of the quarter in which you dated the invoice. This can cause cash flow problems for small business when customers are late paying their bills.

Cash Accounting Scheme
This VAT scheme solves the cash flow problems associated with the Standard scheme and is more suitable for some businesses. VAT is deemed to be owed at the end of the quarter in which you were actually paid for the invoice (and on the other side – when you paid for your purchases).

Flat Rate Scheme (FRS)
This alternative VAT scheme can save you a lot of money in certain industries. You get given a flat-percentage rate dependent on the industry you are in. For example an IT Consultancy Service has a flat rate of 14.5%. You then charge VAT at the usual rate but you only pay HMRC 14.5% of your Gross (meaning inclusive of VAT) turnover. However, you can’t claim back any VAT on your purchases (with a few exceptions for large expenditure), but you don’t hand over all of the VAT you receive to HMRC. This scheme is only suitable for some smaller businesses.

Completing VAT returns can be onerous for small businesses. Submitting a return every quarter can be a burden that incurs additional costs if you need to pay a bookkeeper or accountant.

When starting a new company you do not have to register for VAT immediately. It is not automatic and most businesses will register for VAT when they approach the registration threshold. You choose to purchase company formation with vat registration included within the service, but we recommend you consider if this is suitable for your present circumstances. Unless you are expecting to invoice sales above the registration threshold in your first 12 months, or intend to make a lot of purchases in the first few months, many accountants do not recommend you register for VAT unless necessary.