VAT Registration

System
System Posts: 100,537 🤖 Admin 🤖
edited June 9 in General accounting discussion
Hi does anyone know of any downsides whatsover for a very small business to become VAT registered apart from the extra admin. e.g. are there any hidden setup costs etc.

Thanks
Adrian

Comments

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    Only that if most of their customers are private individuals then their prices will of course be higher. I can't think of anything else.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    and that if they're VAT registered (and accounting for VAT in the traditional way, not using the flat rate scheme), then they can only claim the net value of costs incurred when drawing up the accounts, which will inflate profits, resulting in more tax due.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    I am not with you - inflate profits - how?

    Your turnover might be higher, but so will your costs as you cannot claim back any VAT.

    As a small business it is only worth registering for VAT if the majority of your clients are registered. If they are end users, you could be pricing yourself out of the market if most other people in that particular trade are small OMBs with turnover under the threshold. Joe Public inherently dislikes paying VAT :lol:

    Claudia
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    What I mean is that if, say you had (before registration) turnover of say £10000 and costs inclusive of VAT of £4700, then your profit would be £5300.

    If your customers were all VAT registered and you became VAT registered, then you could add VAT to your prices without increasing the cost to your customer, but then your turnover would still be £10000 with costs of only £4000, hence increasing your profit to £6000.

    Does that make sense? please say if it doesn't!
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    Thanks guys.

    That certainly is a good point Jodie R hadn't thought of that one.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    This is another case of me blurting out something before thinking it through...

    Surely, in my example, making £6000 is better than making £5300? sure, they'll have more tax to pay, but more money to pay it with!

    appologies for the confusion
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    Aye I understand, but its still something I hadn't thought about and is worth bearing in mind.

    Thanks.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    "If your customers were all VAT registered and you became VAT registered, then you could add VAT to your prices without increasing the cost to your customer, but then your turnover would still be £10000 with costs of only £4000, hence increasing your profit to £6000. "

    Getting into purely hypothetical situation, but I'm curious...
    If you did that, wouldn't you add a VAT liability of £800 that you didn't have before?
    I may be totally wrong, but this was my thinking:
    If you add VAT to your prices without increasing the actual value the customer pays, that would make £8500 + £1500 VAT.
    Your costs would be £4000 + £700 VAT.

    This would create a liability of (£1500 -£700) £800.
    So wouldn't this be a case of more profit, but less actual money?
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    No you've already collected the cash (in the form of vat on invoices) from the customers.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:VAT Registration

    yeah, in my example you would get in cash of £11750 from your customers, but when you're drawing up your accounts your turnover is only the net value of sales, ie the £10000.

    The customers, although they're paying you more in cash, can reclaim the VAT they pay you, so it's not actually costing them any more.

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