When you start a new business you are not obliged to register for VAT. You only have to do this when your anticipated turnover in a twelve month period exceeds the threshold. The threshold does change each year, but at the time of writing sits at £82,000. Otherwise you are free to decide whether or not this is the best option for your company.
As formation agents, Simple Formations often gets 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 to the threshold, 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 – that VAT is deemed to be owed to HMRC at the end of the quarter in which you dated the invoice. This can cause cashflow problems for small business when invoices are not paid during the same period.
Cash Accounting Scheme This solves the cashflow problems associated with the Standard scheme. 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 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. Lets assume 11%. You then charge VAT at the usual rate but you only pay over to HMRC 11% of your Gross (meaning inclusive of VAT) turnover. You can’t claim back any VAT on your purchases (With a few exceptions), but you don’t hand over all of the VAT you receive to HMRC.
In summary, you do not need to register for VAT as soon as you form a new company and it is not part of the process. If you want or need to register with HMRC, then do not pay anyone for providing this service. You can apply to be register for VAT online. It is a free service with HMRC.