VAT voluntary registration - worth the 'hassle'?

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I'm in the middle of setting up a company with a co-director (to be). And having 4th baby in around 5 wks so very exciting and busy time!

I've been doing some research and it seems that voluntarily registration for VAT is worthwhile - but whilst it may involve filing a VAT return 4x a year I've also read about being able to get away with doing it once a year. Our initial turnover wouldnt' be over around £50k.

Any advice about this would be very welcome! Thx

ONLY if all of your clients can recover the VAT.
Otherwise you have just put your prices up by 20%.
Quarterly VAT returns - never heard of annual. Cannot imagine HMRC cashflow liking that.
How much VAT would you recover to make it worthwhile?
HMRC probably will not let you register if you are a refund return BTW.

There are a couple of things that are well worth considering in making your decision:

1. When is your turnover likely to go over the threshold, which is currently £70k in a 12 month period? At this point you have to register so unless you artificially inflate your pricing now, you'd have to add on 20% at that time in order not to affect your profit margins - customers/clients are unlikely to welcome such a large price increase (unless they're a business that can recover the VAT, then they may not react so badly). (I'm assuming you want your business to grow beyond £70k turnover p.a. - if you definitely want to stay small, don't bother registering at all.)

1. Do you want your business to appear larger than it really is to start with? Formalising things with VAT registration can make your business look bigger if that's what you want. (For some people, this is tied in with perceptions about how established/professional a company is too.)

Doing a VAT return is really not that much hassle as long as you're very organised about the records you keep day in and day out with sales and purchases, so if I were you I wouldn't be swayed by the hassle, I think it's more important to think of other considerations such as those above.

Also just to say, even if you do an annual return you still have to make regular payments during the year, so it's an admin benefit (potentially) rather than a cash flow benefit.

thanks both: enjoyingthecalm: that's helpful and reinforces what I've heard. I think the perception about being established and professional is a real bonus for my company (writing business).

ALL our clients (I can't think of any exceptions right now) would be VAT registered so our rates wouldn't make a difference to them.

Our only outgoings, other than professional fees (which I suppose includes VAT which we could then recover come to think of it?!) would be website related fees and basic expense. No office rent, products to buy etc.

So on that basis it seems worth it.

Oh, turnover unlikely to reach £70K for a while yet - partly as my workload will have to decrease over the next yr or so with baby no 4 imminent - so it really is only voluntary reg i need to be concerned with.

professional fees (which I suppose includes VAT which we could then recover come to think of it
have a look back through their past invoices to see....
remember that Charities cannot normally reclaim VAT etc etc
this really is one for a face to face meeting with your accountant who knows your history and records

Great, thanks for your advice. appreciated!

I see it a bit more simply. If you are VAT registered one of two things happen:

If your clients can recover VAT then your profit goes up by 20% of your (VATable) costs.

If your clients can't recover VAT then your profit goes down by 20% of your turnover.

Choose accordingly!

Also, if you don't have a lot of VATable inputs it may be worth looking at the appropriate flat rate scheme which may boost your profits by effectively allowing you to claim more input tax than you actually incur.

mranchovy - don't you have to pay that extra 20% back to the inland revenue?! So it's not profit at all! Ie it's not your money to keep!

yes and no.

if you buy a lot of materials that include VAT, non registered the bill is £120, registered the bill is £100 + £20 VAT which is reclaimed.

but for any sort of professional services business with low overheads the margin is not much.
A business I deal with saved about 3% on costs by registering.

As MrA says - check out flat rate vat scheme.

Sorry, I only seem to have confused things :(

Let's go with your example:

You have sales of £48,000 (makes the sums easier) and costs of £2,500 on which you pay VAT at 20% ie £500.

If you are not registered for VAT you invoice your customers £48,000 and pay out £3,000 to your suppliers for a profit of £45,000.

If you are registered for VAT and so are your customers, you invoice £48,000 plus VAT of £9,600, and pay out £2,500 plus VAT of £500. You have a profit of £45,500 so you are better off by £500, 20% of your costs.

But if your customers are not registered for VAT they are not going to accept you costing them 20% more (otherwise you could just stay unregistered and raise your price), so you have to drop your net sales to £40,000. You invoice £40,000 plus VAT of £8,000 and pay out £2,500 plus VAT of £500. Your profit falls to £37,500 - ouch.

But here is the best bit - if you can opt in to the flat rate scheme you may be even better off. Different percentages apply to different trades, so if your trade is journalism, a rate of 12.5% applies (this is reduced by 1% as an additional incentive in the first year, but I'll ignore that for now).

In this case you invoice £48,000 plus VAT of £9,600 ie £57,600 but you only have to pay 12.5% of £57,600 to the VAT man so you have net sales of £50,400. You pay out £3,000 in costs (you can't claim the VAT under the flat rate scheme) so you have a profit of £47,400. The VAT man has paid you £2,400 for doing a bit of paperwork!

That REALLY helps, thank you! Yes, my trade is journalist and I saw that flat rate on the HMRC website earlier. Our overheads will be minimal so yes, def worthwhile by the looks of it!

Thanks again for that example x