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Should you Register for VAT for your Business & How can it Affect your Price?

VAT (Value Added Tax) can somewhat seem confusing to new business owners. Moreover, VAT can have a great impact on your business if you don’t have a complete understanding of it. For example, VAT directly effects the pricing of your services or goods. Hence, if this is the first time you are opting a VAT registration for your business, you might want to know exactly how it affects your pricing!

How is VAT and Pricing connected?

For businesses to be eligible for VAT registration, their taxable income (i.e., total income) must reach the required threshold which is mandatory for VAT registration. So, once you have completed a successful VAT registration, you should charge a VAT on your customer for each sale of your product or services. Now, you can do this in the following two ways:

a.) In the first case, you keep the price of the product/service unchanged. This means that you have incorporated the VAT in the price. So, this in turn reduces your profit margins because with each sales, you would be the one who will be paying for the VAT.

b.) Alternatively, in the second case, you can increase the price of the product/service by adding the required VAT percentage. However, since this inclusion increases the price directly, it could discourage your customers from buying your service if they are not VAT registered (VAT registered customers can reclaim their VAT).

So, we can clearly see that registering for VAT can have a great impact on your business since the entire pricing module changes!

How much VAT should you Charge?

The amount of VAT charged greatly depends on the type of service or product you are offering. It will also change if the product has been imported or exported. So, to clear all these doubts, we have divided the VAT rates into three categories below.

1. Standard Rate

The standard rate of VAT is the most common and it accounts for more than 90% of the goods and services sold. So, this means that majority of businesses would come under this bracket, which is 20% (as of 2021-22).

2. Reduced Rate

The VAT charged for the reduced rate is 5%. Businesses who sell aids for older people, domestic fuel, car seats that are specially made for children and many more!

3. Zero Rate

Now, there are certain business which fall under the zero VAT bracket. Examples of such are books, newspapers, clothes for children, motorcycle helmets, etc. However, even if these businesses are under the zero VAT bracket, they would still be required to file their VAT for the financial year.

What Factors should you consider before Charging VAT?

There are mainly two type of businesses: B2B(main clients are businesses) and B2C (main clients are customers). Now before charging VAT, you must first identify the target domain for your business. Suppose its for B2B. So, here you are aware thar the main clients are businesses. Hence, you should find out whether they are VAT registered? If yes, then its probable that they can offset their VAT! However, if they aren’t, then this can greatly impact your sales as well as their cash-flow.

Secondly, if your business is B2C, you must be well aware that almost a majority of customers are not VAT registered. So, this means that they have to pay a 20% premium directly from their pockets. Hence, this would discourage them to opt for your product. However, you can’t pay this VAT from your pocket too, as this would result in a considerable decrease in profit margins. So, here are some important points that would help with taking this crucial decision.

· You must know what your competition is charging. Are their products priced at a premium including tax or are they charging the same?

· Also, next what you can do is share the VAT premium with your customer. This means that if suppose the VAT rate is 20%, you introduce a 10% premium on the price. Hence, the customer is paying a 10% premium and the other half is paid from your pocket. This creates a balance and takes some price load off the customer!

· Alternatively, you can even inform your customers in advance before incorporating VAT charges and increasing the price. So, your increased price won’t come as a shock to your customers.

Which VAT category do you Fall in?

Before registering for VAT, you must be well aware of which category you fall in. This is because a 20% VAT addition might greatly impact your business (although a 5% one would not do much). So, to know more about the VAT rates based on various goods and services, you can refer to this government data.

Income Threshold for VAT registration!

To get a VAT registration for your business, your annual taxable income should reach the threshold of £85,000. Although it is obligatory to register for VAT after reaching this threshold, there are some businesses who voluntarily choose whether or not they should register!

Why should you Register for VAT?

There are some businesses owners who voluntarily decide to not go for VAT registration. Although, there’s nothing wrong with it since each person can go through varied circumstances, however, if you decide to go for one, you can have certain benefits. Some of them are:

· A VAT Refund: This is a great benefit! HMRC gives a VAT refund to businesses who have registered for VAT. This gives them an opportunity to reclaim the VAT used for purchases in your businesses. However, you get a VAT refund only if the VAT on the purchase value of goods and services exceed the VAT collected through sales from customers.

· Create a Legitimate Impression: Having a dedicated VAT number adds professionalism and legitimacy to your business. This is very important in the field of B2B businesses!

· Avoid Tax-Fines: There can be some years where your business profits reach the VAT threshold. In such cases, if you aren’t VAT registered, you might incur tax-penalties. To avoid such cases, some businesses voluntarily register for VAT.

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