Odd situation that perhaps could benefit from paid advice but others may have useful insight…

I’ve formed a new small company expecting to stay below VAT threshold, and am negotiating my first significant contract (but not more than VAT threshold!). Customer (in Germany) expects a VAT number. If I register voluntarily, they will pay the VAT directly in germany (reverse charge procedure) and then I can claim back VAT on expenses incurred in UK, right? So that’s a win for me, compared to if we keep everything VAT free.

I realise that in general VAT registration would put up my prices but not in this case as the germans have basically already anticipated paying the VAT on top of the agreed sum, and there is no option to just take the extra money in my pocket (cos they won’t pay it).

Have I overlooked any pitfalls/drawbacks in this idea? How much of a pain is the VAT process anyway? Worth it for a couple of thousand quid in a year? I could try arguing with the germans but that might not get very far….

I realise that in general VAT registration would put up my prices

The question is – who are the rest of your customers? Your prices only go up if you’re selling to other non-vat registered entities (other small businesses or ‘the public’ who can’t themselves reclaim vat). If you mostly provide services to other (larger) businesses then VAT makes no difference to them. What does make a difference is you can pass on the vat efficiency to them – so you can potentially be cheaper to those costumers without cutting ‘your’ price – as in the price you charge for services on top of expenses.

Worth it for a couple of thousand quid in a year?

Invoicing with VAT is easy – vat returns are 4 days work a year. Just look at what you’re likely to spend on vat-able goods each year and decide for yourself if its worth the effort.

Thanks – the simple answer is I don’t really know whether future customers will happily add VAT on to the prices or not. Contracts are likely to be one-offs and one at a time so I should be able to deregister for the next time if it’s beneficial. Basically the company is being set up specifically for this first contract so it’s a bit of a stab in the dark where we go in the future (but no ambition or expectation of exceeding the VAT threshold for what is hopefully going to be just a bit of part-time work). Sounds like it is worth it for this one anyway, a couple of (posh) laptops and a bit of travel could work out at around 1500k in VAT to claim.

a couple of (posh) laptops and a bit of travel could work out at around 1500k in VAT to claim.

Make sure you know what the situation is with those purchases if/ when you deregister – you might find materials you supplied and equipment you’ve kept are treated differently resulting in having to partially repay the VAT you’ve reclaimed on de-registration.

Do you sell to companies or individuals?

maccruiskeen, is spot on with his advice. If you’re clients are VAT registered then it makes sense for you to be. If not make your VAT status in line with the core of your clients.
As he also stated you would have to repay any VAT on stock and assets when you deregister at their market value. If it is a lot of hassle.
Deregistering because your clients are not VAT registered isn’t a valid reason either:
you cease making taxable supplies.
your intention to make taxable supplies ceased.
you sell your business (but see paragraph 2.3)
your legal status changes (but see paragraph 2.4)
you disband your VAT group (but see paragraph 2.5)

Customers will either be companies/universities, or funding could come direct from governmental funding agencies as part of joint bids. Basically academic research subcontracted to universities or research bodies but with us staying outside of any formal employment status. I’d think most people won’t necessarily distinguish between 50k and 50k plus VAT as the money’s not coming out of their pocket. But if someone has 50k left over in a budget looking for a good home then perhaps it might end up as either 50k or 42+VAT depending on our status. But that bridge can be crossed as and when it’s necessary.

It may well be that if I don’t register, the germans simply won’t be able to (or prepared to) handle the contract, in which case it’s all….academic.

That’s a good point about purchases. Employers in the past have usually been pretty slack with equipment that ends up going home (and is used personally right from day one) but it’s probably worth being a bit more careful ourselves!

Another thing I’d take into account is that HMRC is, without doubt, the most incompetent organisation on the planet.

I would do everything in your power to minimise your dealings with them. Whichever government minister it was who declared them ‘not fit for purpose’ was being extraordinarily generous

As he also stated you would have to repay any VAT on stock and assets when you deregister at their market value. If it is a lot of hassle.

Does this apply on the flat rate scheme?

If you claimed VAT on it then you would be repaying it on any unused portion.

Does this apply on the flat rate scheme?

Only for capital expenditure items over £2k (IIRC, IANAA)

I just made sure everything I had bought had been fairly written off in the books

I’d be looking at the flat rate vat scheme. It’s not as good as it was but if you have enough goods expenses in a month then you’re not clobbered with the higher flat rate for those of us who don’t deal in goods being service companies. Even then it’s still a small saving, or no worse and it does make VAT returns a lot easier.

Myself, clients have required VAT registration, some won’t deal without it, and it puts some off.

Well the germans have insisted they want to pay vat so I’m just going along with it for now. I wasn’t really thinking of jumping in and out of the VAT scheme regularly, we’ll only dereg as and when it starts to be a big drag and the laptops will probably have been fairly written off by then. With any luck this lot will turn into semi-regular customers in the future (though we are all wary of disguised employment) in which case we’ll be stuck with it anyway. Everything I’ve googled says they really don’t need to pay VAT but they are insistent they want to…there’s no threshold for exemption for small businesses in Germany so they probably just haven’t come across the possibility before.

I’m flat rated. Its not as good as it used to be – I charge 20% and pay 16%.

Think the reclaim threshold is £1000 on expenditure. I’ve never bought anything that I could reclaim the vat on.

in which case it’s all….academic.

well I thought that was funny!

Flat rate here. Government meddled with it and created a new category of 16%. Idiots.

It’s an extremely simple book work job too.

Still fairly easy for us to stay in our 13% bracket though.