VAT Registration: The Pros and the Cons

Should I register for VAT or not?

If you are turning over £79,000 then VAT registration is mandatory. If you are turning over less than £77,000 VAT registration is optional.

VAT registration might work in your favour if:

• You customers are mostly or solely business customers, because VAT will not impact on them usually;
• If you supply zero-rated goods or services, such as exports outside the EU.

VAT registration will usually not work in your favour if:

• Your end-customer is not a business customer; for example, if you’re an electrical engineer and your end-customers are mostly private households. This is because by registering for VAT your services will become more costly and make you less competitive.

If you are already VAT registered or if you decide to become VAT registered, there are some quite handy schemes:

Flat Rate Scheme

Under this scheme, you don’t claim back the VAT you pay to your suppliers or on your expenses. You pay VAT on your total invoice amount at a Flat Rate. This system is very helpful for small businesses that don’t want the hassle of keeping all their receipts to claim input VAT.

For example:

For an invoice of £100, VAT is charged @ £20, making the total invoice value £120.You pay VAT on £120 multiplied by the Flat Rate.

In addition, for IT contractors and businesses that primarily provide services, the Flat Rate scheme is a good tax-planning tool because these sorts of businesses do not spend much on VAT-rated goods and services, which means therefore that using the discounted Flat Rate, they can actually save on the VAT they have collected from their customers.

Cash Accounting Scheme

Cash accounting is useful for managing cash flow. Whether you are on a Flat Rate or Standard VAT scheme, the Cash Accounting scheme can be handy for businesses when customers are not paying on time, because under this scheme, you pay VAT on what you have received from your customers.

How is VAT worked out?

VAT is worked out on the basis of the invoices raised during the quarter. This means you might pay VAT that quarter on an invoice for which you have not yet received the income.

For example, your VAT quarter is January 2012 to March 2012. In January 2012 you raise an invoice for work carried out in December 2011. For VAT purposes this income belongs to the quarter that ends March 2012, and this means that you must pay VAT on the December 2011 invoice in the quarter ending March 2012. In another scenario, you create an invoice in March 2012, but have not received the payment by the time we prepare your VAT return in April 2012. You are still liable to pay VAT as the income belongs in the quarter ending March 2012.

In a nutshell, for the purposes of VAT, DNS report income based on invoices created in the quarter, and not on the receipts received in the quarter. This means that for all income received from customers during the period January to March 2012, the invoices for which were created in previous periods, you are not required to pay VAT on those receipts. So, you see, it does all work out in the end.

Our tip is this: to overcome late-paying clients and other cash-flow problems, you may find the Cash Accounting scheme very useful, and the soon-to-be-released DNS online accounting portal will launch with the Cash Accounting scheme as a component of its capabilities. This means that many of our clients will definitely be able to overcome some of the problems mentioned above.

Please speak to your account manager to find out more, and carry on watching this space.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.