Why your startup SHOULDN’T register for VAT

Updated on July 19, 2022


When starting a new firm, many entrepreneurs believe that value-added tax registration is a must (VAT).

VAT registration could appear to be a wise, mature option that will help establish your startup’s reputation and stability in the market.

Is registering for VAT compulsory? It’s a lot of work, but is it worth it? Garry Staunton first explains why new businesses should avoid the hassle and expense of applying for VAT registration.

Why would you register for VAT if you don’t need to?

Clients frequently ask me about this, especially those who are just starting out, so I decided to spend some time on it. There are many businessmen who don’t know if the benefits of VAT registration exceed the costs.

Many EU countries demand my VAT registration for non-EU residents and customers outside the EU. As a new business owner in the UK, you are not required to register for VAT.

As long as your company’s turnover falls below the threshold, you don’t have to fill out the form. Do not sign up the company right away unless you have an urgent need.

Are there benefits to being VAT registered?

In several EU countries, the registration threshold is zero. With a turnover requirement of £85,000 (currently), it is feasible to trade, maintain turnover low, and avoid the VAT registration process entirely in the United Kingdom. ‘Why should I sign up?’ is another common question I get from clients, and I have to be honest with them about the reasons.

There are some benefits to getting VAT registered, but there are also some drawbacks, and you need to decide if these benefits outweigh the drawbacks for your firm. The following are some of the most significant advantages of having your business VAT registered:

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Being VAT registered has one major advantage: greater cash flow. You can recoup your VAT expenses after you’ve registered.

A VAT refund can make a major difference in the cost of setting up a new business. A lot of stock can be purchased, IT can be invested in, a costly website can be built and expert advisers and consultants can be hired, all of these things can be done. Recovery of these expenses may be a lifeline.
Being VAT registered gives you credibility in the marketplace; that’s the perception. Your firm will be perceived as having greater credibility in the market if it is VAT-registered, and people will assume that your company is larger than it is and has been operational for a longer period of time.
Winning more business — If you’re a B2B company looking to do business with large organizations, they may probably ignore suppliers that aren’t VAT registered.. When applying for a contract, registering for VAT could give you an advantage.

Your business could be at risk because of the lack of VAT registration of your rivals in the huge corporate market. After all, prospective customers want to know that you can be relied upon and that your business is secure.

What are the downsides of VAT registration?

What are the advantages of this circumstance to you? As a result, in order to reap the benefits of this strategy, you will need to regularly collect VAT from my clients, file quarterly VAT returns in order to recuperate your VAT expenses, and pay HMRC the VAT you have collected from your consumers. this. Although it may be tedious and time-consuming for some businesses and industries to implement, others would find it extremely difficult to do so.

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Registration for VAT has a number of downsides.

Once you start looking into it, you’ll find a deluge of things to consider. Negatives include, but are not limited to:

When you submit a VAT invoice after being VAT qualified, the VAT is passed on to your customers.

Your pricing will rise as a result. If you’re a business-to-consumer (B2C) seller, your prices have gone up by 20%… To be 20 percent more expensive than the next plumber on Google isn’t going to get you many jobs as a plumber who mostly serves residential consumers Because they don’t know how to recoup their VAT, other businesses may find it difficult to compete with the higher pricing.
One of the disadvantages of the VAT process for a new firm is its complexity.

There are some businesses, such as financial services, where the rules are simple, while there are others, such as manufacturing and import/export, where the rules are exceedingly complicated.
Health care and property are two of the most common industries that are exempt from VAT.

B2B customers in these industries should not be charged VAT because they cannot recuperate it. Determine your target audience and sector before settling on a VAT percentage.
This process is so complicated that there are several methods to avoid asking for the VAT you are due.

VAT claims can easily be overlooked.
If you’re not an accountant, you’ll need to hire someone to handle the paperwork for you if you sign up for VAT.

You’ll need at least £10,000 in expenses and at least £2,000 in VAT costs that you may be able to claim in order to get started.
In the event that you fail to file and pay your VAT within the allotted time period of one month and seven days, you risk penalties.

Those who are chronically late or unable to pay face severe penalties.

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This can quickly spiral out of control and end up costing you more money than you bargained for if you fall behind on your tax returns.
Do you think that registering for VAT is such a good idea? That’s what I’m trying to get at. Although VAT registration has certain benefits, you don’t have to leap in headfirst.

Should you register for VAT?

For example, the recent reduction from 20% to 5% VAT on restaurant food shows that VAT laws and rates are always changing.

Costs associated with the coronavirus are projected to drive up VAT rates in the coming years.

Managing the changeover within your company and charging clients effectively are crucial when VAT rates change. If you make a mistake, you could be accused of fraud and face legal repercussions. Financial advisors can help you weigh the pros and cons of being VAT-registered before making a final decision.

Many companies have incorporated and registered themselves automatically when there was no real benefit to doing so.

Even registering for VAT on the first day of a firm is rarely a good idea. Proceed with the implementation of your VAT plan once you’ve secured the business you’re after. The key question is whether or not registering for VAT would actually benefit your business. If you don’t want to, you don’t have to.

For the time being, you can chose whether or not to register as long as you make less than £85,000.

When making a decision, keep an eye on your company’s financial performance and consider VAT as an opportunity rather than a burden.