Is it worth me registering for VAT

[Michael Wright]

Hi Everyone, I will probably approach an accountant soon but before I do I wondered if I could get some advice or clarification on something first.

I have been operating as a sole trader since April 2016 and I am within about £2k of the £83000 threshold. Current profit is about £28k gross.

I think registering for VAT is going to be an inevitability and I would be able to claim a fair but back, but I'm always going to owe the VAT man as opposed to him paying me! However I've only really got February and March left of this year. In my game, this is generally a quiet period.

I just don't know whether to register now and try to hammer it for the remaining period to ensure I still make money. Or down tools, register ready for the start of the next tax year and increase prices to buffer the vat.

Is there a way of me calculating at which point I won't lose any money, this would give me a target to aim for if I am to stick a rocket up my ar5e for the next 2 months!

I am not trying to avoid taxes in anyway, or "aggressively" play the system, I just want to make sure I don't end up ripping myself off by registering too soon. I don't like the idea of turning work down although I could scrape through until April if need be.

 

[STDFR33]

It appears as though you think the VAT turnover is based on the tax year. It is actually calculated in a 12 month rolling turnover.

 

[faradaykeynes]

VAT taxable turnover is the total value of everything you sell that isn’t exempt from VAT.

You must register for VAT with HM Revenue and Customs (HMRC) if it goes over the current registration threshold in a rolling 12-month period. This isn’t a fixed period like the tax year or the calendar year - it could be any period, eg the start of June to the end of May.

more details on here https://www.gov.uk/vat-registration/calculate-turnover

 

[TheCyclingProgrammer]

You only lose out financially from being VAT registered if you have to absorb the VAT into your current prices to stay competitive rather than simply charging VAT on top of what you already charge.

If you can afford to simply add VAT to your existing prices, or only slightly reduce your prices to compensate, then you might benefit from being able to reclaim VAT on your costs.

If your customers are VAT registered businesses you shouldn't need to change your net price.

 

[Michael Wright]

Hi all, thanks for the replies so far, maybe I should clarify...

It appears as though you think the VAT turnover is based on the tax year. It is actually calculated in a 12 month rolling turnover.

No, I am aware of what you said thanks, I just decided to start trading on my own the 4th April, so all of my sales started 4th April. I was previously employed full time so it just coincided nice to roll one from tax year to the next. My only other earnings prior to April 4th 2016 were from that previous employment, for which all my taxes NI etc were automatically deducted.

I don't know whether that clears it up or confuses it further!

This is also similar to faraday keynes statement, again thanks.

You only lose out financially from being VAT registered if you have to absorb the VAT into your current prices to stay competitive rather than simply charging VAT on top of what you already charge.

If you can afford to simply add VAT to your existing prices, or only slightly reduce your prices to compensate, then you might benefit from being able to reclaim VAT on your costs.

If your customers are VAT registered businesses you shouldn't need to change your net price.

Most of my customers are residential and its pretty much a one off sale. I do get commercial clients also though, which are more likely to be repeat businesses and steadily increase in numbers over the years.

So correct if I'm wrong, but at the moment I'm liable to pay tax and NI on my profit (approx 28k), which using the .gov calculator comes to around £5340.

If I register for VAT now, how are my taxes paid and calculated?

 

[TheCyclingProgrammer]

If I register for VAT now, how are my taxes paid and calculated?

In exactly the same way, except net of any VAT.

Say your gross sales for the year are £50k and your tax deductible expenses are £10k giving you a taxable profit of £40k. You pay tax and NI on that £40k.

If you're registered for VAT and you don't change your net prices (so you just add VAT on top), your total sales will still be £50k (+VAT). You would have collected £10k in VAT on top of this however, assuming all £10k of your expenses incurred VAT too, this would offset what you'd pay to HMRC. Input VAT on your expenses would be £1666, so you'd pay £8,334 to HMRC in VAT. You'd pay tax and NI on £41,666. Being VAT registered has reduced your costs due to being able to reclaim VAT.

However, lets say you don't want to increase the gross price to your end customer as it will cost you business. You decide to absorb the VAT by effectively reducing your prices.

That means your turnover would be £50k INCLUDING VAT. After accounting for VAT, you would be left with £43,332 and a taxable profit of £33,332 on which you'd pay tax and NI.

 

[Michael Wright]

Hi The Cycling Programmer, thank you for that explanation, if I could put this into perspective in my own scenario.

So with my current self employed "no vat" sales at £81k, with a net profit of £28k, I am only liable for tax and Ni on the £28k, which is around £5340.

But, lets say I registered for VAT today and started charging it to my clients, and between now and April 4th sold another £10k gross (of which £1666 is VAT). Is my end of year tax calculated on the total sales of £91k? Or will it be split?

 

[TheCyclingProgrammer]

To keep it simple, assuming you incurred no additional costs between registering and the end of the tax year, your net sales would be £88,334 and your net profit would be £36,334. In reality you'd probably incur costs in that time so you'd have some input VAT to reclaim and your net profit would be slightly lower.

 

[Michael Wright]

Thanks Programmer, its starting to make sense now you kept it simple lol!

In your last example, assuming nothing changes, I see it as being better off (i.e a smaller tax bill) staying as is, and not exceeding the £83k?

 

[TheCyclingProgrammer]

Thanks Programmer, its starting to make sense now you kept it simple lol!

In your last example, assuming nothing changes, I see it as being better off (i.e a smaller tax bill) staying as is, and not exceeding the £83k?

Not sure I agree with your logic. If you sold another £10k and therefore had to register for VAT and account for VAT on that £10k, your net income after tax would be higher, therefore you'd be better off.

What you have to consider is whether being registered for VAT would be better for you longer term. If you don't think being VAT registered will have an impact on your overall turnover and you can get away with not having to reduce your prices to compensate (or only partially reduce them) then why limit your turnover just to avoid registering?

 

[Michael Wright]

Indeed, maybe I was becoming too obsessed with paying and not how much I was earning! Great help thank you.

I've read that by registering I can claim back up to 4 years of VATable purchases? I've bought things like a van, tools, machinery etc before starting up so if I do register these will be able to go towards reducing my output VAT? I don't think I can claim for fuel though? is there anywhere I might find a more detailed list of what is and isn't allowed?

 

[Scalloway]

Purchases made before VAT registration

https://www.gov.uk/vat-registration/purchases-made-before-registration

 

[MyAccountantOnline]

...
I've read that by registering I can claim back up to 4 years of VATable purchases? I've bought things like a van, tools, machinery etc before starting up so if I do register these will be able to go towards reducing my output VAT? ........

Yes if you still have them at the date of registration. You can also claim for services up to 6 months before the date of registration.