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Should I be VAT registered?

The first thing you need to look at as a business, is if you are legally obliged to be VAT registered? Depending on which country your business is based in - the rules are different for each country and the rules (monetary requirement) change frequently. Basically the main point of consideration is how much turnover (total sales) in a rolling year you have made. It's important to note that it is a rolling year and not two fixed points. So check the company threshold for your country - see below - but check on their official websites as these figures might not be up to date.

VAT Thresholds

Austria €35,000
Belgium €35,000
Bulgaria BGN 70,000
Croatia €35,000
Cyprus €35,000
Czech Republic CZK 1,140,000
Denmark DKK 280,000
Estonia €35,000
Finland €35,000
France €100,000
Germany €100,000
Greece €35,000
Hungary HUF 8,800,000
Ireland €35,000
Italy €35,000
Latvia LVL 24,000
Lithuania LTL 125,000
Luxembourg €100,000
Malta €35,000
Netherlands €100,000
Poland PLN 160,000
Portugal €35,000
Romania RON 118,000
Slovak Republic €35,000
Slovenia €35,000
Spain €35,000
Sweden SEK 320,000
United Kingdom £79,000

If you haven’t exceeded the threshold for compulsory registration you can still register voluntarily if it makes financial sense for your company to do so. We will look at that later in the article.

What is VAT?

VAT tends to effect you whether or not you have a business or not. VAT is basically a government idea in order to raise taxes to pay for everything the government pays for. It is usually placed on items that are considered luxury items - the idea being that if you are rich you can afford to pay for items that aren't necessary to function through your everyday lifestyle. So for example we consider that it is necessary to cloth our children so those items don't have VAT on them. The government might also want to encourage people to eat certain goods or buy certain items...so for example in the UK...books have zero VAT on them although if you are unlucky enough to live in Denmark then the rate is 25%. The danes are pretty tough on VAT - it's 25% across the board - these Danes don't mess about! Although again different items have different levels of VAT depending on which country you are in.

You can download the VAT rates for 2014 and for what items VAT is applied too for free.

A lot of the time when you go in a shop and buy something, unless you look at the till receipt you won't notice you are paying a tax on it. Most shops tend to be VAT registered.

So If you’re a VAT registered business then you are essentially an unpaid tax collector for your government. You have to add VAT at the appropriate rate to everything you sell depending on which country you're in and what the item is. This additional income isn't yours - it goes into your bank account when you initially get it from your customer but you have to give it to the government. There is usually a set time when you have to pay this money back to the government - usually every 3 months but again this depends on the country your business is located in.

What's good about VAT?

Well apart from raising money for the greater good (the government), and you can argue about that point a long long time. VAT seems like a bit of a nuisance...well here is the good bit if you are a business...when you buy items from another company who is also VAT registered - they charge you VAT but you can claim this VAT back. Also if you buy from another country they won't charge you VAT at all - due to the fact that each country has different VAT rules they decide to abandon it all together in this case...but only if you are both VAT registered.

So suppose you are a business and buy something for €200 +20% VAT (€40) for a total of €240.

Then you sell it for €400+VAT(€80) = €480

So being VAT registered in this case your outlay is €200 (you get the €40 back from the governemnt) and you get €400 (you pay €80 to the government) back - profit €200.

If you weren't VAT registered you still have to pay €240 but you don't get the €40 back...so if you sell it for the same amount this time you only make €160.

Also if you are buying a product which is VAT applicable such as fabric and then making that fabric into clothes for example and you are selling in the UK - it becomes a no brainer to be VAT registered as you can claim all the costs back from buying the fabric / making it - but then not have to charge any more money in selling your finished article to the general public in the UK.

The other good thing about being VAT registered is status - very much like being a limited company - you are seen as being a proper business if you are VAT registered. By not being VAT registered you are telling the people of the world you don't turnover much and therefore your business isn't very big...of course the general public probably won't notice the implications of your business when they are clicking on your website to buy that shiny new object! Quite frankly they propably couldn't care less whether or not you are VAT registered as long as the final price is right.

Why should I not register for VAT?

The reasons to not register for VAT are a few.

If we go back to the above example where we seemingly made €40 by being VAT registered. Now if we look at that calculation again - if instead of selling our product for €400 and we sell it for €450 instead. This time you will make €210 profit and the customer only pays €450 instead of the €480 if the VAT was added on. You gain and the customer gains...but the government loses out....well most people don't have too much sympathy for governments...after all it only goes to public funding which is squandered most of the time (politics politics!).

What you have to decide is - who is your customer? If you are selling to the general public then it's probably a good thing for you not to be VAT registered - this way other companies which are VAT registered won't be able to compete with you as well - as you should always be cheaper than them as you have no VAT to add onto your products. If you are selling to businesses B2B - then they are likely to be VAT registered - so they won't care about the extra VAT as they can just claim it back anyway.

Can we charge VAT if we aren't VAT registered?

Absolutely not is the obvious answer to this question. Some companies do this though - but if you are caught out then you are likely to end up with big fines and end up in jail...so don't do it!