How to register for VAT: Guidance for start-ups

To start with, let's be clear about a few things:

1. The same VAT rules apply whether you're a sole trader, partnership or limited company.
2. You can voluntarily register for VAT before you reach sales of £85,000.
3. If you sell to consumers, consider whether you want to increase your prices to include VAT before you reach that £85,000 figure.

Selling to consumers (business-to-consumer, or B2C)

If you incurred heavy costs setting up your business, and paid VAT on them, you may want to recover that VAT regardless of the impact on your price. You might have spent VAT on things like machinery, IT equipment, fitting out a retail shop or building a website.

If you haven't yet made many sales, you can still register voluntarily and claim the VAT back.

The downside is that all your sales will need to include VAT. Consequently, you must make sure your margins are large enough to pay over the VAT element to HMRC, leaving yourself enough margin to make a profit after you've paid all your costs.

You'll need to consider your competitors too. If they are charging their customers VAT, you're at least competing on similar terms.

Selling to businesses (business-to-business, or B2B)

Your business customers usually expect to pay VAT even if they're not VAT-registered themselves.

Your decision as a start-up, therefore, revolves around:

• how much VAT you paid when setting up your business
• how much you'll pay going forward
• the admin costs of sending in VAT returns each year or each quarter

You may also want to be VAT-registered merely to give the impression that your business is larger or more established than it is.

Goods or services, UK or overseas

Be clear as to how the relevant VAT rules affect you.

If you're selling within the UK goods that are zero-rated (such as certain food products), you'll want to be VAT-registered straight away. This is because you get to recover VAT on all your costs but you don't have to include VAT in your price.

Similarly, if you're providing a service to businesses overseas, you don't charge VAT to your customers, but you can be VAT-registered and still reclaim VAT on all your costs!

Costs already incurred

The good news is that you can recover VAT on money spent before you register for VAT. So, if you hadn't really thought about VAT before, you can still make a backdated claim.

If you registered for VAT from 1 February 2022, you could reclaim VAT on services paid for from 1 August 2021, such as business phone bills, software subscriptions and rental leases.

You could also recover VAT on the stock you hadn't yet sold from 1 February 2018 or later. However, you would pay VAT on anything you had sold since the date you chose to register.

Overall, you'll see there are some numbers to play with before making a decision.

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