VAT vs Non-Vat

As you strive to set up your gas engineer business, a plethora of decisions will pave your path. One of the more critical ones is whether to become VAT registered. Before you dive into the VAT pool, let’s take a moment to understand what it really means for your business.

What is VAT Registration?

VAT or Value Added Tax is a type of tax that’s levied on the value added to goods and services. As a business, when you become VAT registered, you are obliged to add VAT onto your charges for the services you provide. Simultaneously, you can also claim back the VAT you have paid on your business-related purchases.

The Pros of VAT Registration

1. Bolsters Business Legitimacy

Being VAT registered can give your business a more professional and established image. This can often lead to increased trust from clients and other businesses, enhancing your reputation within the industry.

2. VAT Claims on Business Purchases

One of the significant perks of VAT registration is the ability to claim back VAT on business purchases. This includes everything from fuel and tools to the van you use for your business. This can often result in substantial savings.

3. The Cash Offer

Every now and then, a customer may offer you cash to sidestep the VAT. Of course, you won’t agree to this, so you can disregard this point.

4. Potential Financial Benefit

If a large portion of your client base is VAT registered businesses, they can claim back the VAT you charge, making your services more financially attractive to them.

The Cons of VAT Registration

1. Increased Labour Costs for Non-VAT Registered Customers

Unless your customer is VAT registered, your labour price will appear more expensive because you need to add VAT. This might deter some potential customers from using you.

2. Regular VAT Returns

Being VAT registered means you will need to file quarterly VAT returns. This process can be time-consuming and will require meticulous record-keeping.

3. Need for Financial Discipline

It’s vital to ensure you put aside the VAT you charge customers and not spend it. It can be tempting to use this cash, but remember, it’s not a revenue stream; it belongs to the taxman. A tool like Starling Bank can help with this by allowing you to create different spaces for your money, making it easier to manage your finances effectively.

4. Administrative Burden

VAT registration comes with its share of paperwork and bureaucracy. Keeping track of VAT invoices and receipts can be a daunting task and may require additional administrative support.

The VAT Impact on Pricing

At first glance, it may seem that VAT registration simply tacks on an additional 20% to your overall costs, making your services more expensive for your customers. However, the reality is a bit more nuanced. VAT doesn’t add 20% onto the overall cost—it only adds 20% onto the labour, because you get to claim the VAT back on the materials. Here’s an example to illustrate this point:

Let’s consider a non-VAT registered business charging a total of £2500 for a new boiler installation—with the boiler costing £1500 and the labour amounting to £1000.

Now, let’s take a VAT registered business. Given the same cost breakdown, they could charge £2700, which includes VAT. This is calculated as follows:

– For the boiler, the cost remains £1500 including VAT, both the VAT registered and non-VAT registered business pay VAT on the materials.

– For the labour, the VAT registered business would charge £1000 plus 20% VAT, which totals to £1200.

Notice that the VAT registration only added on £200 to the total cost, not the full 20% of the overall cost. This is because even the non-VAT registered business will be paying VAT on the materials.

In this example, while the VAT registered business appears to be £200 more expensive, they might be able to offer the job for less. This is because they can claim back the VAT on overheads like tools, vans, and fuel, thereby reducing their business costs. This might enable them to offer more competitive pricing in the future.

So, while VAT registration may initially seem like a cost burden, its impact on your pricing strategy and the potential savings on your overheads make it a decision worth considering carefully.

In conclusion, the decision to become VAT registered should be based on a careful consideration of these pros and cons, tailored to the specifics of your business. It might be beneficial to seek advice from a financial advisor or a tax professional before making your decision. Remember, what works for one business might not necessarily work for yours. So, make sure to do your homework before you turn the VAT key in your gas engineer business!