VAT stands for Value Added Tax and is a general tax placed on almost all goods and services sold. The simple principle behind VAT is that the end consumer pays tax on the product they buy.
A business has a legal requirement to register for VAT once its turnover reaches £85,000 and they will have to start charging VAT on the products you sell. If you miss this deadline, HMRC will seek to claim for any VAT that should have been charged on your work. This is very common and can leave you massively out of pocket. You are able to try and collect any VAT from your customers that should have been paid however we both know that would be very difficult.
If you have incurred any business expenses on equipment or materials etc you can claim back up to 4 years worth of VAT which can be a great cash boost for your business (this includes before you have registered your business). The same rules apply for any services however only for the last 6 months.
Deciding to start your business as a VAT registered will come down to your individual circumstances and there are a few questions you will need to think about when deciding to be VAT registered:
Who are your ideal customers?
If you are dealing with commercial clients, then they are likely to be VAT registered so are able to claim back the VAT on your invoice. If you are dealing with residential clients, then they are not able to claim back the VAT charge so in this case, it can be beneficial to not be VAT registered. However, if you do breach the £85,000 turnover limit, you do have to become VAT registered.
How do you want to position your company?
Similar to how a limited company makes you seem more established and professional, the same again can apply to being VAT registered. If you are working with VAT registered businesses then you are now 20% cheaper as they are able to claim back the VAT costs on your invoices.
Are you looking to grow your business past £85,000 turnover?
If you are looking to grow a business and pass £85,000 turnover, which is £7,000 a month (this is pure turnover, costs are not included within this), then it is highly recommended to start off as VAT registered.
If you are VAT registered from the start then your customers will not see a 20% increase in price due to becoming VAT registered later down the line.
What are the downsides to becoming VAT registered?
If become VAT registered it down come to one big downside... the paperwork! (However this can be removed by working with accountants.
Once you become VAT registered, you will be required to add VAT to all your clients invoices, keep VAT invoices and receipts for your company records.
You will also need to submit monthly or quarterly or annual VAT returns depending on how the scheme is set up.
If you do a lot of domestic work then this could make you more expensive compared to a non-VAT registered company however as you know, undercutting everybody to win the work is not the way to go!
Do you make a high amount of purchases?
Like any construction business, you are likely making a high amount of purchases. If you are a VAT registered business, you are able to claim back VAT on business expenditure!
Becoming VAT registered might seem like a negative however if you are looking to grow your business it is actually the exact opposite. When a company is VAT registered is makes them appear larger than they actually are. Every consumer understands the concept VAT and understands that large organisations charge them VAT when they buy products. This same thought process is applied to your business.
Especially when you are starting out, becoming VAT registered from the start can allow you to claim back all VAT expenditure and in many cases, it results in a VAT refund from HMRC to help with your cashflow!
Overall we would recommend being VAT registered from the start, especially if you are looking to grow your business but it comes down to your business objectives and your current position.. If you need any support in becoming VAT registered or if you would like to ask some questions specific to your situation - speak to the Saint Financial team today.
This article was written for Construction Insider and Saint Financial Group. Saint is a multidisciplinary group based in the UK that helps construction businesses develop and grow. SaintFG offers a range of quality solutions in supporting businesses.
Saint provides the luxury of free business consultancy for all of our clients, call now for your free consultation with a friendly business advisor to discuss your burning questions and put that energy back into your business!