VAT for small businesses

AlexLever17

Hi, I'm starting up a new digital marketing agency where I'll be charging clients monthly on an hourly basis. I don't expect to make more than £500 per month as profit, especially during the first year as I'll be targetting smaller local businesses. Therefore, I can't imagine that my clients will be making enough revenue to claim back VAT.
My questions are as follows:

1. Is it a legal requirement to register for VAT? If so, is it common practice to charge clients my usual rate (e.g. £150 per month) and then add another 20% on top of the invoice for VAT? 
2. In regards to other requirements, is it just a case of setting it up as a sole trader and sending self-assessments every year? or is there anything else that needs to be done too at this stage? 

Savvy_Sue

I believe you have to register for VAT when turnover hits £85000, and profit doesn't enter the equation. So what's your projected turnover? There is a voluntary flat rate scheme which is useful for some.

You cannot charge VAT if you're not registered.

If in doubt, talk to your accountant. It's not an area you want to get wrong. 

martindow

Agree, speak to an accountant.  Generally, if you are selling or providing services to individuals it is best to avoid registering for VAT until you are obliged to by your turnover hitting the threshhold. 

If your customers or clients are VAT registered then it can be advantageous to voluntarily register as they will not be concerned and it allows you to reclaim the VAT element of your expenses.  Some clients of large companies might be a bit wary of dealing with small companies and being VAT registered effectively hides a lower turnover.

Mistral001

AlexLever17 said:

Hi, I'm starting up a new digital marketing agency where I'll be charging clients monthly on an hourly basis. I don't expect to make more than £500 per month as profit, especially during the first year as I'll be targetting smaller local businesses. Therefore, I can't imagine that my clients will be making enough revenue to claim back VAT.
My questions are as follows:

1. Is it a legal requirement to register for VAT? If so, is it common practice to charge clients my usual rate (e.g. £150 per month) and then add another 20% on top of the invoice for VAT? 
2. In regards to other requirements, is it just a case of setting it up as a sole trader and sending self-assessments every year? or is there anything else that needs to be done too at this stage? 

Inform HMRC when you have started trading.  It might be worthwhile not to start trading until 6th April.  If you start on or after that date you will not have to send in a tax return until January 2023. 

bris

The only reason to ever register for  VAT is if you are at the 85k or your services are exempt from VAT so you can claim VAT back for business equipment, expenses etc. 

Not being VAT registered can give you an edge over VAT registered competitors, especially when they are not registered to claim it back.

Grumpy_chap

bris said:

The only reason to ever register for  VAT is if you are at the 85k or your services are exempt from VAT so you can claim VAT back for business equipment, expenses etc. 

Not being VAT registered can give you an edge over VAT registered competitors, especially when they are not registered to claim it back.

I am not sure about the "only reason" stated above.  Depending upon the target client-base, there may be an expectation that any supplier is VAT-registered and being so can give the small company an apparent greater credibility.

If the target client-base is not VAT-registered, which is likely in the OP's case "targetting smaller local businesses", then your comments are wholly valid.

justworriedabit

bris said:

The only reason to ever register for  VAT is if you are at the 85k or your services are exempt from VAT so you can claim VAT back for business equipment, expenses etc. 

Not being VAT registered can give you an edge over VAT registered competitors, especially when they are not registered to claim it back.

Indeed.

Can someone start up a new co every 10/11 months to avoid VAT? IE, feels going into VAT area?

martindow

justworriedabit said:Indeed.

Can someone start up a new co every 10/11 months to avoid VAT? IE, feels going into VAT area?

I am sure they can't, or at least if they did would come a cropper.

In an analagous situation I once asked an accountant about the possibility of splitting a business in two to keep both under the VAT threshold.  I was very strongly advised not to do this as HMRC would take a very dim view of that once they realised.