This is one of the most common questions that I am asked. Mainly when clients have been taking
advice from a ‘mate’ in the pub, particularly after spending a lot of money either on stock to sell on or machinery for the business to use.
Unless you have to register for VAT (because you have exceeded the £85,000 threshold), or being VAT registered would not cost you money, the short-term VAT reclaim on stock / assets would be less than the VAT payable on later returns.
Using a furniture retailer as an example with an average sale of £100.00 which cost £50 + VAT (£60 including VAT).
Whilst the business is not VAT registered the average profit per sale is £40.00 (£100.00 Sales price less £60.00). Once the business is VAT registered this profit falls to £33.33. Loosing £6.67 on average to HMRC.
As the business is selling to consumers the £100.00 retail price would remain the same once the business becomes VAT registered, therefore whilst it would be in a position where it could reclaim VAT of £10.00 paid per item sold, it would loose £16.67 of each sale to VAT.
If this was a new business with long term plans to exceed the £85,000 VAT threshold, delaying VAT registration the business could save VAT of up to £5,669.50.
As an added bonus VAT that was paid on assets such as computer equipment, packing tables, racking for storage within 3 years of registration can be claimed back, as well as any stock that hadn’t been sold at the date the business is VAT registered.
A different example would be an on-line children’s clothes retailer, as the VAT on children’s clothes is 0%, it would be worthwhile VAT registering as no element of the sale would be lost to VAT but any VAT incurred on costs could be reclaimed.
VAT on the surface can see a straightforward tax, wrong advice can cost a business a lot of unnecessary tax. If you are thinking about registering for VAT or unsure that you are on the right scheme for VAT please get in touch.