VAT is an extra amount which VAT-registered businesses need to charge on taxable sales, so registration can impact your fees and profit margins. It can be a confusing topic, so in this article we’ll explain what happens when you register, and what this means for pricing.
What does VAT have to do with price?
A business must register for VAT once its taxable turnover reaches the £90,000 VAT registration threshold.
Once they register for VAT, businesses must charge VAT on the taxable sales they make to customers, and then pass the amount they collect on to HMRC. In that respect you’re basically acting as a VAT collector! This VAT charge leaves you with a choice:
- Keep your prices the same, and include the VAT: The amount you charge to your customer won’t change, but you’ll make less profit because you’ll have to pay the VAT out of the money you make.
- Add VAT to the existing prices: The amount you charge to your customer will be higher, even though you won’t be earning any more money from the sale than before. They’ll only be able to reclaim the VAT if they’re VAT registered too, so the new price might put them off.
Or, you might go somewhere in the middle, making a smaller price increase and absorbing the rest from your profit margin. Whichever option you go for, registering for VAT can have a huge effect on the way you run your business and what you charge for goods or services.
How much VAT do I need to charge on goods or services?
The amount of VAT you charge depends on what you’re selling. The rules for charging and paying VAT are a bit different for goods and services you import or export, so to keep things simple we’ll talk about UK VAT in this article.
The different rates of UK VAT
| Rate | Percentage | Applies to |
| Standard | 20% | This is the standard rate that applies to most goods and services. |
| Reduced | 5% | Goods such as children’s car seats, energy for domestic use, and other energy-saving materials fall into this category. |
| Zero | 0% | This includes things like shoes for children, books, clothing, and most foods. The sale is still VAT taxable, but at a rate of 0%. You must still record these sales in your VAT accounts, and report them on your VAT return. |
Pricing considerations when charging VAT
There are several factors which might affect your thought process towards pricing after registering for VAT, such as who you usually sell to, and what rate will normally apply to things you supply.
Who are your primary customers?
Your customers or target market might influence your pricing structure. For instance, are they other businesses or are they general consumers buying for their own personal use?
If you mostly sell to other businesses, do they tend to be VAT registered? This usually means they’ll be able to reclaim any VAT against their own VAT return, though paying the VAT to you might affect their short-term cashflow.
Consumers who aren’t registered for VAT may be put off by a 20% increase on the price they normally pay. But, if you don’t add it on, you’ll be the one paying the VAT, rather than collecting it from your customers. Like most business decisions, the best solution depends on personal circumstances, but it might be worth considering:
- What your competitors charge, and whether or not this includes VAT
- A smaller price increase which includes VAT. This basically means you’ll be sharing the VAT with your customer. For example, raise your prices by 10%, so your customer effectively pays half of the VAT, and you pay the other half.
- Letting your customers know in advance about any pricing changes
What rate of VAT applies to your goods or services?
If the things you sell fall into the reduced rate or zero-VAT category, it makes pricing fairly straightforward. Charging customers an additional 5% isn’t so dramatic a price hike, and zero-rated items are better yet.
Should I register for VAT voluntarily?
Not every business needs to register for VAT and in fact many won’t ever have to. Whilst you’re obliged to register for VAT if your taxable turnover reaches the £90,000 threshold in any 12 month period, some businesses do benefit from voluntarily registering for VAT. If you have an accountant, have a chat with them about what works for you.
How do I register for VAT?
Whether you have reached the threshold or are voluntarily registering, the process is the same. You can register for VAT online, or by post, or through an agent. Most businesses will be able to register online, including partnerships and groups of companies.
You’ll need to decide which type of VAT scheme you will register your business for.
Learn more about our online accounting and VAT services. Call 020 3355 4047 to talk to one of the team, or get an instant online quote.
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