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Should I Register for VAT?

Updated: Jul 17, 2019


This is such a common question from all start up businesses, especially those applying themselves to the Amazon FBA platform as their main shop front. The Simple answer is ‘personal preference’ before of course you reach the £85,000 revenue threshold (At the time of writing).The trick is, how do you decipher what your personal preference is? Here are some helpful tips:

  • If you register for VAT, you will look more professional. You will appear to be more of an established company than a ‘newbie’ who is obviously under the £85k threshold. How important is that to you?

  • Once registered, the fear is of course your competitiveness. You will need to add another 20% to your sell price, or increase to a level you are happy with which then absorbs some margin that you’ve enjoyed + knowing you’ve got to give 20% of it back to HMRC.... However;

  • Don’t forget, for every 20% on your sales price you give back, you can now reclaim 20% on your product cost which is usually paid either on importing, or to a VAT registered EU State supplier.

  • So, lets say your margin is currently 33%. To make the sum easy; your cost per SKU is £100, your selling price is £133. The VAT you have to give back to HMRC is £22.17 and your net sell price is £110.83 - ‘Oh No, that’s just eaten my profit and I’m now down to 10.1%!” - NO!!! You’ve forgotten about the VAT you can now reclaim! You will be able to reclaim £16.67 from your £100 cost which now brings your net cost down to £83.33 instead of £100. So the actual real loss from your competitiveness is much smaller than you first thought. You used to make £33, but now you make £27.50. However;

  • How has it affected your % margin? The real funds are down slightly, but a net cost of £83.33 + 33% as per your original mark up = £110.83. The SAME exact price as you originally had with taking off the VAT. In simple terms, it does not matter too much for going VAT registered with regards to margins. They stay the same, and you will just take a small hit on actual revenue in this case £5.50.

  • It’s not just about reclaiming VAT on the product. You are now also enabled to reclaim VAT on Everything your business buys. Travel Expenses/Fuel, Office equipment including software, Hardware, IT and development costs. There are so many things you are entitled to reclaim VAT on for your business which could go over and above removing any shortfalls on margin. This is where guidance from your accountant will step in.

  • CASHFLOW - There’s a benefit to being VAT Registered for any business that isn’t flush with cash. Unless you’re lucky enough to sell your entire purchase order of stock within the same month, or even the same quarter, you’ll be paying out your VAT within the costs of importing or purchasing, but waiting until you sell the product in total before you get your cash back through the door. At least being VAT registered, you can re-claim the VAT element within that first quarter or, if you can register for Monthly vat returns to get it even quicker.

When our first business started just over 10 years ago, we remember the comment made to us back then

If you believe your business will grow and grow, and end up requiring to be VAT registered anyway, then save yourself the bother of switching later and just start as you mean to go on. It’ll get you used to handling VAT on a small scale, rather than switching later amongst a busy flourishing business.

We couldn’t agree more.(This advice is based on a UK company, importing to UK - if you want to sell in other parts of Europe and allow for taxation, there are a few specialists that help with a one stop shop monthly subscription to handle all of your taxes and VAT registrations for you such as FBA Hero)


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