VAT Registration is optional if your turnover is less than £70,000. If your Turnover exceeds £70,000 then VAT registration is mandatory. The key to whether you should register or not lies in your customer base: if your customers are mainly businesses and VAT registered you should go for VAT registration, but if your customers are mainly VAT registered customers, you may lose clients to competition.

Example 1 – Registering for VAT can be advantageous

John started his plumbing business and supplies services mainly to industrial customers that are all VAT registered. John should register for VAT and recover his Input VAT (VAT on supplies). Even better, John has the option to register for the VAT Flat Rate scheme.

Small businesses with a turnover of less than £150,000 can join the VAT Flat Rate scheme. This means that you can collect VAT at the full standard rate, while paying at a lesser rate.

For Example if you make sales of £10,000 and collect VAT of £2,000, you could save around £300 to £400 depending on your trade classification. Go to theHMRC Ready Reckoner to check what rate you would pay.

Example 2 – Registering for VAT can be disadvantageous

John decides to expand his business to include household customers. He goes to Mrs Jones’ house to quote for a job and submits a quote to her for £100 plus 20% VAT. Mrs Jones had requested quotes from two of John’s competitors, one of whom does not charge VAT and, therefore, quoted £100. Mrs Jones went for the quote for £100 as, because she’s not VAT registered she can’t recover the VAT. For household customers, Input VAT is an irrecoverable cost.

So John lost out on the job because he was VAT registered, and if you’re VAT registered, you MUST charge VAT.

Registering for VAT is compulsory if your turnover exceeds £70K. However, if your business is turning over £70K it will have a sufficient customer base, financial rigour and inbuilt efficiency to compete with non-VAT registered businesses. So VAT registration can be advantageous and save you some money. BUT be warned if you register too early and you’re client base is mainly domestic, it may work against you, so make sure you get it right.