With any new company in the UK, it is important to understand VAT. VAT or value added tax is something that every person who is setting up a limited company will have to deal with and it is important to understand your VAT threshold and when you are required to register for VAT.
VAT is not as daunting as it sounds. In fact, there are a number of benefits to your company for registering. The VAT threshold in the UK is currently £85,000. If the annual turnover of your company is over this threshold then you are required to register for VAT. Not doing so within 30 days of exceeding the threshold constitutes a fine. Note that this figure is always liable to change. It has in fact, risen in just the past two years. You should always check each year to determine what the current VAT threshold is for that annual period so that you can keep yourself up to date.
If your business turnover exceeds this threshold then you must by law register for VAT. You can however, voluntarily dissolve your business if you do not want to register. Registering for VAT simply ensures that you are ready for your company to grow. It creates a positive impression about the intent of your company and it allows you to claim VAT on any purchases.
Registering for VAT means that you are obeying the law, which is a benefit in and of itself. It will also allow you to reclaim any VAT that you may be charged when you are purchasing goods and services that you need for your company. You can also collect VAT from your customers which will help to save your company some money.
Of course, there are always downsides to every upside. Registering for VAT also means that you could potentially end up paying more to HMRC. You will have to spend more time on paperwork to ensure that your accounts are up to date and you may have to pass on higher prices to cover the extra costs that you may endure. If your turnover falls below the current threshold, then you may want to seriously consider whether or not registering for VAT is in your best interest. An attorney or a professional accountant can help you to make more sense of VAT and whether it can benefit your business if you do not meet the standards for registering.
There are different VAT schemes that are available for companies and it is important to know which of these is best for your business. The flat rate scheme means that you pay a percentage of your annual turnover to HMRC. Note that you cannot claim back VAT on your own purchases if you choose this scheme. There are other schemes that may be more beneficial to you, depending on your turnover for each annual period. Speak with your accountant or a business attorney to learn more about the benefits of each scheme and to learn which one may be best for your unique company.