Once again – Do NOT Register for VAT Unless you HAVE to!

Welcome back!

It’s Friday and time for another Reader’s Question. In these weekly blog posts I publicly answer a question/topic sent in by my blog readers. If you want to participate, all you have to do is send in your question using my help desk here. Even if your question isn’t picked for this blog post series, I will still personally reply to you with a full answer within 24 hours, Monday – Friday (and normally much sooner than that!).

Going back to today’s question, I really don’t like to be repetitive but there are some topics that simply need to be repeated as there can be some serious consequences if you make a mistake with this.

Here’s the question Michael sent in:

Hi Andrew,

You advise against registering for VAT for as long as possible. However, if I were to register, I would be able to reclaim the VAT paid on any goods I import. And as such the question seems to me to be a tradeoff between a lower price (easier to sell the product) but lower margin (due to lost VAT), vs higher price (having to charge VAT) but also higher margin (due to reclaiming VAT on sourced items).

So, why would you always advise against registering?

Thank you,
Michael

Thanks for your email Michael.

Theoretically you’re correct, yes. Sell for a lower price when you’re not VAT registered and for a higher price when you’re VAT registered BUT this only works on paper.

In real life, on platforms like eBay & Amazon, you’re not the one who determines the product price. Well, you can of course set it as you like but essentially demand will dictate the price you can charge for your products.

That is unless you sell something totally unique, with no competition. But such situations are very rare and people can usually compare prices for similar products so it’s not like you can simply set the price at any level you want.

So in reality we have to look at a more real life scenario when you have to sell the product for the SAME PRICE – VAT registered or not. And if you do this, you realise that being VAT registered simply means paying more tax.

Also, don’t forget that when you register for VAT, accounting becomes much more complex and if you don’t have good numbers skills, usually this means that you need to outsource your book keeping which is of course an additional expense. For a new business, not making much sales in the beginning, even a £50 monthly accounting fee is a lot!

So, to sum it up – you really don’t want to register for VAT when you’re just starting out. There are no real benefits to doing so, period.

There are some exceptions to this, for example:

• When you sell 0% VAT goods (such as baby wear, children’s clothing) – then it’s a good idea to register for VAT as you’ll be able to re-claim VAT back on expenses but won’t have to charge your customers VAT.

There’s a full list of VAT rates here:

https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services

• When you start a new business and expect to invest lots of money in warehousing, manufacturing equipment etc. This will only apply to people who have serious budgets and big plans in place who know that they will invest large sums of money to get their business going.

Lastly, if you have a complicated situation with cross-border sales etc., I strongly recommend you find an accountant you can consult with as I’m not a tax advisor and can’t really give advice on specific and complex issues (for that I have my accountant!).

Have a great weekend everyone!

Thanks,
Andrew