There’s no simple answer to this question, but to help you decide what’s best for you, the table below outlines the pros and cons of each:
|Recovery of VAT on VAT returns
||Possible depression of profitability if customers can’t recover VAT
|Your business may be perceived as looking bigger than it is, gaining additional credibility
||Additional bookkeeping and administration in accordance with VAT regulations
|Opportunities for cash flow planning opportunities in relation to VAT payments
||Possible negative cash flow issues
|Potential gains through using the Flat Rate Scheme (FRS)
||VAT compliance can lead to penalties if errors are made
The main advantage of being registered for most businesses will be the right to reclaim VAT paid on costs. This is also known as ‘input tax’ but with any tax, there are plenty of rules and restrictions on claiming it.
The main disadvantage to registration is the possible loss of trade because you will now have to add VAT to your prices to customers who can’t reclaim VAT. Of course, if you decide to keep your prices the same after registration it will mean you risk a reduction in profits.
Can registration be avoided?
If registration is not going to be good for business, is there anything you can do to avoid it?
One important point is that the VAT registration rules only apply to businesses. This means that if your activity is just a hobby, then they do not apply.
Here are a few factors you should take into account in deciding whether or not your business should exist for VAT purposes:
- Is it a serious undertaking?
- Does it have substance – how many transactions are there and how big are they?
- Is there a profit motive – is making a profit an aim?
Are there any drawbacks to having more than one VAT registration?
Running businesses through different entities such as partnerships, companies or as a sloe trader sounds like a clear way to avoid VAT registration, but there are a couple of things to bear in mind. Firstly, the costs of running several small businesses are likely to be more than running one larger one. And importantly, the VAT man doesn’t like it as he’ll lose out, so the law gives him powers to say that where a business has artificially been split into smaller ones, he can insist that they be registered as one. However, he’s required to prove that the split is artificial, and to do this he has to consider the financial, economic and organisational links between the businesses.
Beware: Businesses artificially split to avoid VAT registration are likely to be attacked, and can mean having to pay arrears of VAT with interest and penalties.
What will be looked for where the businesses have been split?
Where you run two or more businesses each with a turnover below the registration limit, any transactions between them must be made at market value. Make sure that each business acts like a genuine stand-alone enterprise:
- Discounts: The company can’t get discounts from its associates just for being related, but you’re allowed to give the same discounts as you would offer to a regular customer.
- Costs: Does each business bear its own costs or are they being paid for by a connected company?
- Bank accounts: Each business must have its own account. One company can act as banker for another, but it should make a charge to the other business for providing this service.
- Accounting records: Each of the businesses must have their own records.
- Feasibility: If looked at in isolation, is each business credible? Do they each have the look of a commercial enterprise? Are they seeking to make a profit?
- Premises and equipment: Do the businesses share these or have their own? Where they do it must be clear that the costs are properly shared.
Beware: If you start up as two separate entities, then all’s well and good. But if you wait for the turnover to approach the registration limit (£81,000), and then split the businesses in two, will set the alarm bells ringing!
The ever widening scope of VAT, the constant stream of detailed changes to the regulations, and the ever growing demands of HM Revenue & Customs - calls for a well trained professional eye!
We will ensure that you do not fall foul of the regulations, and do not pay the Exchequer more than you need to!
You can find out more about our VAT service on our website. If you prefer, please fill in an enquiry form on the right and we’ll call you straight back and answer any questions you may have.