Once they register for VAT, businesses must charge VAT on the taxable sales they make to customers. This 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 seem higher. If they’re not VAT registered they won’t be able to reclaim the VAT, 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, but whichever option you go for, registering for VAT can have a huge effect on the way that 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 that you charge depends on what you’re selling. The rules for charging and paying VAT are a bit different for goods and services that you import or export.
The majority of goods and services sold fall under the standard rate of VAT.
Reduced rate items include children’s car seats, domestic fuel, and mobility aids for those over the age of 60.
Some goods or services are zero-rated for VAT. These include books, newspapers, children’s clothes and motorcycle helmets. 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.
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Pricing considerations when charging VAT
There are several factors which might affect your thought process towards pricing after registering for VAT.
Who are your primary customers?
Your customers or target market might influence your pricing structure. For instance, are they other businesses (B2B), or are they general consumers (B2C) 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 that 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 that 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. If you’re not sure which VAT rate to use, the government publish a list of VAT rates on different goods and services.
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 £85,000 threshold in any 12 month period, some businesses do benefit from voluntarily registering for VAT.
Again, everyone’s different, so the decision to make a voluntary VAT registration depends on your circumstances. If you have an accountant, have a chat with them about what works for you. For instance:
You can claim VAT refunds: By being a VAT-registered business, you can claim VAT on goods or services purchased for your business. If your business regularly pays more VAT on purchases than it would collect on sales, you’ll receive a refund from HMRC.
It creates a better impression: Being VAT-registered and having your own VAT number displayed can leave a good impression for your business. It gives a greater sense of legitimacy and professionalism, which can be especially important if you work in the B2B space.
It may be easier to deal with some businesses: In some cases, suppliers and other businesses may be hesitant to work with non-VAT-registered companies. Not being registered may become a bit of a roadblock if you work in an industry where it’s expected and preferred.
Avoid tax penalties: Sometimes it’s difficult to predict exactly when a business will cross the VAT threshold of £85,000. To avoid penalties some businesses decide to register early, just in case.
To register online, you will need to sign into your tax account and complete the online form. HMRC will send you a VAT number within 30 days, and you will then need a VAT online account to submit your returns.
Registering online is usually more convenient but there are some instances where you can’t register online, and should use a postal VAT1 form instead. These include:
Joining the Agricultural Flat Rate VAT scheme.
If you want to apply for a registration exception, for example because your turnover has passed the registration threshold but this is temporary.
If you’re registering different divisions or units of a business with separate VAT numbers.
What are my responsibilities as a VAT registered business?
Once you’re ready to go as a newly registered VAT business, it’s time to look at the next steps. What does it really mean to be VAT registered? What do you have to do differently now? Being VAT registered means:
You must charge the correct rate of VAT on goods or services you sell, and show these amounts on your invoices and receipts.
Show your VAT number on your invoices, and on other documents such as customs declarations if you ship abroad.
Registering for VAT isn’t all about handing more money over to the government; you might be able to claim some of that VAT back. Businesses pay VAT on purchases all the time, even if they’re not registered themselves, because their suppliers are.
If the total amount of VAT paid on purchases is more than the VAT collected from customers on sales, you can reclaim the difference. If you collect more than you pay, then you’ll pay the difference to HMRC as your VAT bill. This is worked out as part of your VAT return, and you will be notified how much VAT you owe, or is owed to you.