You are not legally obliged to register for VAT unless your turnover exceeds the VAT threshold (currently £81,000 during 2014). Note that this turnover is calculated on a rolling 12 month period so it could be that you hit this threshold within a calendar year, if you think you might exceed this limit it is important to keep accurate sales records. There might be advantages to voluntarily register for VAT, for example: giving the impression to customers that your company is larger than it really is, or when claiming input VAT back on purchases may exceed output VAT on sales (eg zero or reduced rate sales). IF you are at all unsure what’s best for you, you should always take proper advice.
There are important steps to take when thinking about setting up your own business. Firstly, you should decide whether to be a sole trader, a limited company or a social enterprise (sometimes called not for profit businesses). The legal structure you decide upon will have implications for how you run your business, how you employ people and the type of documents you will need to produce. Note that if you decide to be a sole trader, you and the business are not separated legally, therefore all profits and conversely all debts are yours as well as the business’s. Depending on the type of trade, you might decide it is advantageous to act through a separate legal entity to provide your product or service, this can be done through a limited company or a social enterprise. In this case, the company exists as a separate legal entity and will therefore have specific legal obligations.
Regardless of what you decide, it is important to take advice on what is best for you and your business and most important of all you must inform HMRC as soon as possible after you start trading.
Author: Catherine Wainwright
Useful stuff to help small business owners be more effective.