1. Should I register or not?
2. Limit of £70k turnover forces registration
3. Quarterly returns
4. Implications for cash-flow, book keeping,  'locking' records
5. Fixed rate scheme
6. Possible VAT inspection

The important issue for small businesses is whether to register for VAT or not. Generally, VAT works by charging your customers and claiming back from your suppliers. For EU based businesses, this process goes right through the 'supply chain' without affecting your products or services price in any real way - until you get to the poor consumer, who being non-registered has to pay the VAT on the final price.

Therefore, if your customers are the general public or non VAT registered business then it will often be best to be unregistered (but not always!).

Example

Lets say you are a self employed landscape gardener and you are unregistered for VAT. You will have to pay VAT on plants, ornaments, your van, tools and fuel. However, a big part of your charges will be covering your own labour. There will be no VAT on your bill so you will be cheaper than a similar VAT registered landscape gardener. VAT is 20% but don't think you will be 20% cheaper and still make the same profit as your VAT registered competitor if you are unregistered! Even if you charge £100 and he charges £120 the saving to the customer is £20 / £120 which is 15%. This depends on how you look at it, he is 20% more expensive than you but you are only 15% cheaper than him. Worse is to come for the VAT unregistered. Lets assume that half your bill covers materials and half covers your labour. Remember you paid VAT on your materials which your VAT registered competitor can claim back. Therefore you must increase your bill to cover the VAT you can't claim back on about half of the bill total. There is quite a bit of 'hidden' VAT cost in your bill! Nevertheless, you don't still don't charge VAT on the labour part so you might be around 8% cheaper than your competitor - a worthwhile saving. However, consider how many of your clients are private individuals but VAT registered businesses like hotels or business centres. They can't claim back any VAT from your bill which we think is about 8% cheaper than your competitors. However, they can claim back a full 20% from your competitors bill so for VAT registered customers your VAT registered competitor will actually be cheaper than you - and these are likely to be your larger accounts too!

As you can see, all may not be as clear cut as it appears. It is well worth discussing your business with our accountant, taking a look at the sales and costs and coming to the correct conclusion about VAT registration.

Pitfall number one

Especially as it affects start-ups which are happily expanding quickly. This is the issue of tipping over the 'threshold' for VAT registration. For the tax year 2010-11 if your turnover exceeds £70,000 you must register. You can't go on growing your business for ever before you reach a level of turnover where you are legally bound to register for VAT. Be careful! This threshold isn't assessed after every year end and you are not simply allowed to say something like "Oh dear we're over the threshold, we better register". The threshold is tested every three months. One of the advantages of the Discountants Online (DO) software is that you are entering accounts data as you go through the year and simultaneously depositing it with us for you next year end. You might call this "accounting in real time" and it means that if you are in danger of exceeding the VAT threshold in any three month period, DO will be sending both you and us an email about it and we can sort something out before you get into trouble.

Pitfall number two

This is my favourite pitfall because it just goers to show what the world is like when run by bureaucrats and committees! It refers to VAT on food sales and is therefore applicable to a lot of small businesses. We can safely say that VAT is zero rated (not chargeable) on food and drink - unless it is!

Here's a for instance...

"Flapjacks" are zero rated but sell "Cereal, muesli and similar bars with honey or other added sweetening matter" and you must add 20% VAT

It gets better...

"Caramel or 'millionaire's' shortcake consisting of a base of shortbread topped with a layer or caramel and (usually) chocolate or carob" are zero rated but sell "Shortbread partly or wholly chocolate-covered" and you must add 20% VAT

We haven't finished yet...

"Chocolate chip biscuits where the chips are either included in the dough or pressed into the surface before baking" are zero rated but sell "All wholly or partly coated biscuits including biscuits decorated in a pattern with chocolate or some similar product" and you must add 20% VAT

and finally, under our banner headline "Jaffa cake ousts gingerbread men at tax office childrens' party"

"Jaffa cakes" are zero rated but sell "Gingerbread men decorated with chocolate unless this amounts to no more than a couple of dots for eyes" and you must add 20% VAT

Quite.

Anyway, for food retailers it is generally good to be VAT registered as you can claim back on some of the food and most of your running costs, like electricity and capital costs like freezer units and displays etc. For restaurants, all you sales will attract VAT so you may find yourself offering better prices if you are not registered. Again, each case is different and you are advised to discuss it with your professional advisor first.