VAT for start-up business

Joe sets up a business in January. The business is selling widgets to consumers. None of his sales are to businesses. In January he forecasts his annual turnover to be €35,000. He is not required to register for VAT so decides not to.

Joe spends €10,000 plus VAT of €2,100 on new equipment. The cost to Joe is therefore €12,100. As he is not VAT registered he cannot claim this VAT back.

Business goes better than expected and in September he forecasts his turnover for the forthcoming year to be €80,000. He is now required to register for VAT effective from the September/October VAT period. He will be required to charge VAT on all his sales and will be entitled to reclaim VAT on certain business expenses (from 1 September only). Joe charges €10 per widget. Now that he is VAT registered he must charge VAT on sales. He can do this by either:

  1. Charging VAT on the €10, ie €2.10 with a total cost to the consumer of €12.10; or
  2. Assuming that the €10 is now VAT inclusive, ie the cost to the consumer remains €10. Of that Joe gets €8.26 and Revenue gets €1.74

A difficult decision: increase your price and lose competitiveness or reduce your profitability?

If Joe opted to register for VAT from day 1 he would avoid that difficult decision. Granted he may have some added compliance costs but his purchases would be lower as he could reclaim VAT on these, including the €2,100 VAT incurred on equipment.

kashflow for managing VAT

Here are 4 key questions to ask yourself when deciding whether you should register your startup business for VAT:

1. Who are your customers?

If your customers are are VAT regsitered businesses they should be able to reclaim the VAT your charge to them.  If your customers are private individuals, or other organisations that are not VAT registered, they can’t reclaim the VAT.  That has the effect of increasing your price to them.

2. Will you incur significant amounts of VAT on start-up and ongoing costs?

If you are making significant investment in equipment, furniture and other start-up costs you can register for VAT and reclaim the VAT charged to you.  This could help cash-flow and reduce the amount of funds you need to raise.  Similary if you have high overheads you will improve your profitability if you can reclaim the VAT charged to you on these.

For example, Rent is a significant overhead for many businesses. The VAT rules for property are notoriously complex, however if a landlord charges VAT on rent it could significantly increase this cost. If the business is VAT registered and entitled to re-claim VAT on purchases it should also be able to reclaim the VAT charged on the rent.

3. What are the compliance costs likely to be?

Every business decision should have cost/benefit considerations.  Will the additional accountancy costs (including your own time) exceed the VAT reclaimed?

4. How soon will you reach the registration threshold (if ever)?

Perhaps this question should be asked first.  But I assume you’re probably reading this as you don’t think you’ll exceed the registration threshold within your first year (and of course you’re making taxable supplies).

BUT, remember: the test for VAT registration is not whether or not you have reached the threshold, it is whether or not you are LIKELY to reach the threshold in any 12 month period.

When starting is business the VAT question should be answered before you spend any money. If you make purchases and later decide to register you may not be able to reclaim the VAT on those purchases.

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