VAT stands for Value Added Tax. VAT is a consumption tax that is added to products and services. So, when your business purchases products or necessary resources from a supplier, you’ll need to pay VAT on these items. Then, your business will charge VAT on top of the final selling price for your products or services, and it’s your customers that pay this VAT.
Businesses that are VAT registered must gather VAT from their clientele and then pass this money on to the government. Typically, your company is only obligated to pay the government the difference between the VAT you paid the supplier and the VAT you have since accrued from your own transactions.
Requirements for VAT registration by businesses will vary from country to country, and sometimes even from city to city. When you start your business, it’s worth checking when you will have to register for VAT.
Also known as a sales or revenue threshold, once your business’s annual profits exceed a certain amount, you will be required to register for VAT.
Some ‘businesses’ may not be required to register for VAT immediately. For example, freelancers or sole proprietors may have a higher threshold to meet before they need to be VAT registered.
If your business imports/exports goods or services, this may affect the requirements for VAT registration.
If you provide digital goods such as software, or digital services such as subscriptions in more than one country, you may be required to adhere to VAT requirements in all jurisdictions.
The short answer is no, you do not lose money solely by being VAT registered. This is because VAT is paid by the end consumer, customers who buy your products, and your role is to pass it on to the local or national government.
As you’re simply acting as a middle-man between the customer and the government, you don’t lose any money. However, some business owners still say ‘being VAT registered is killing my business’. VAT registration can give the impression that your profits are decreasing…
If you’ve found yourself thinking ‘being VAT registered is killing my business’, it may be because of:
Although there are some disadvantages to being VAT registered, there are some advantages. These are:
If you’re left feeling like being VAT registered is killing your business, there are some ways you can lower your bill. These are:
If you registered for VAT voluntarily but still do not meet the requirements for compulsory registration, you can withdraw your registration. Check your jurisdiction’s VAT requirements as your business may be exempt depending on the types of goods or services that you offer.
However, if your business does meet the threshold for VAT registration, you must pay that VAT to the government. Even if you feel ‘being VAT registered is killing my business’, you are legally obligated to pay VAT. If you don’t comply with VAT regulations you can be fined or legal action may be taken against your business.
Voluntary VAT registration is when you choose to register for VAT, even if your business does not yet meet the requirements.
Voluntary VAT registration can have some advantages. If you pay high amounts of VAT to suppliers, it may be worth registering for VAT so you can reclaim some of these expenses.
If your business does not meet the requirements for VAT registration, voluntary VAT registration can have disadvantages. Ensure the amounts you’ll be able to reclaim from business expenses balance with the VAT you’ll need to charge your customers.
The conditions for when a business should become VAT registered will differ. They depend on where your business operates and whether it engages in international trade. When your business reaches a particular scale or deals with specific types of products, VAT registration becomes necessary.
If you feel that being VAT registered is killing your business, there are a few ways you can lessen the impact on your profits. These include making the most of flat-rate and cash accounting schemes, focusing on exempt or zero-rate products and services, and exploring group registration.
Ultimately, voluntary VAT registration can help you in the long run. But, this decision is not to be taken lightly and you should ensure voluntary VAT registration will still allow you to achieve your business goals.