VAT is a statutory requirement for any business making taxable supplies, once its turnover exceeds £64,000. What often catches the unwary here, however, is that this limit applies to any 12-month rolling period – not your accounting year.

Take, for instance, a company which starts trading in June 06 and turns over £60,000 – below the limit – in the year to June 07. But it could have a bumper six months to December 07 followed by a really poor six months to June 08. So the year from June 07 to June 08 could still be below the limit – but the rolling 12 months to December 07 could very well breach the VAT limit.

In such an instance, HMRC will go back and register you from when you should have been registered and will treat all your sales as gross and reclaim the VAT.

The further complication is that you are not able to de-register for VAT until you have been registered. So if you are registering retrospectively – even although subsequent to that date you may have fallen below the deregistration limit – you can’t actually de-register retrospectively resulting in you having to account for VAT over a period in which you were not actually required to be registered!

So why not register for VAT immediately you may ask? This decision very much depends on the nature of your business and your customer base. If, for example, you are supplying goods or services to VAT Registered business then your customers will be able to reclaim the VAT you charge them. If, however, your customers are the general public, then they will not be able to reclaim the VAT. In this instance, assuming you are charging the maximum price that market conditions will allow, then registering for VAT will actually reduce the profitability of your business.

There are many factors involved in deciding when to register for VAT, if at all, and it is, therefore, important to obtain professional advice as early as possible.

For more information on any accounting, tax or business planning issue in franchising - please call Adam Hardie or Kevin Booth at French Duncan on 0141-221-2984