How to deal with VAT invoices when you’re not VAT registered

How to deal with VAT invoices when not VAT registered

When you set up a business you don’t have to register for VAT too, you can be an unregistered business (as long as you’re not over the turnover threshold – see below for more!).  Other businesses that you work with – suppliers or customers will be VAT registered.  We talk alot about how things work when you are VAT registered, but how does it work if you’re not VAT registered?

Selling when you’re not VAT registered

So, first of all the quick and easy bit.  If you’re not VAT registered you don’t need to charge VAT on your sales! The price you give is the price people pay. Quite straightforward. 

How does my business compare to a VAT registered business?

You’re selling something, let’s say bicycles, for £500…

Halfords are also selling bikes in town. They are VAT registered so need to sell the same bike for £500 plus 20% VAT. Halfords need to pay £100 to HMRC and £500 goes towards their profit. Their customer has to pay them £600 in total. What a rip off. 

There’s another business down the road – Big Bad Bikes Ltd are trying to compete with your excellent price! They’re also selling bikes for £500, and their customer pays £500 in total. However, Big Bad Bikes are VAT registered so their price includes 20% VAT. They are required to pay HMRC 20% of the net price, which is £83.33. And only £416.67 goes towards their profit. 

When you sell a bike for £500, the whole amount goes towards your profit. And you don’t need to pay anything to HMRC. Happy days!

How do I deal with purchase invoices, as a business who isn’t registered for VAT?

When you are given purchase invoices from suppliers, they will likely list it out as:

Net: £100

VAT: £20

Gross: £120

You will physically pay the gross £120, and as you can’t reclaim the VAT you will absorb the cost. Your accounts need to show the full gross amount of £120. 

Someone who was VAT registered would only show the cost as £100, the VAT isn’t a cost to them as they are going to reclaim it from HMRC. 

What if my customer asks me to provide a VAT invoice?

If you’re not VAT registered, you don’t charge VAT, and therefore cannot issue a VAT invoice. This is true even if the goods you are selling had VAT on them when you originally bought them.

What happens if I become VAT registered later?

The VAT threshold is currently £85,000. Once your rolling 12 month sales reach this limit, you are required to register for VAT. 

You can also choose to register for VAT voluntarily. You might choose to do this because you want to be able to reclaim VAT on your purchases. Maybe it’s a status thing, being VAT registered can make you more credible. 

Once you’re VAT registered you’ll need to do a VAT return every 3 months. This reports how much VAT you’re charged to your customers, and how much VAT you’ve reclaimed on your purchases. You’ll pay the difference to HMRC (If your purchase VAT is more than your sales VAT you’ll get a refund).

When you do become VAT registered, HMRC will allow you to go back and reclaim VAT on your purchases before your registration date. However there are limits to this: 

  • For goods, you can backdate and reclaim VAT up to 4 years before your registration rate, as long you still own the goods.
  • For services, you can reclaim VAT up to 6 months before your registration date.

Perhaps you invested in some new equipment, or had to upgrade your laptop? As long as it falls within the limits above, you can backdate and get the VAT back from HMRC on your first VAT return. 

However, please note that if your accounts are already done with the full amount and you then wish to reclaim the VAT, then you’ll need to re-do your accounts and re-submit them (and of course pay for this!).  Same with your bookkeeping, if you’ve paid to have it all done and then need it amended to reclaim the VAT, again, you’ll need to repay for the bookkeeping to be amended.

So just because you can go back and claim for previous purchases, it doesn’t mean it’s always a good idea – sometimes it could end up costing you more than you are able to reclaim!

If you’re interested in becoming VAT registered, please get in touch with us, by popping over to our Work With Us page – completing the quick questionnaire and booking a discovery call with us.  Speak soon!

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