In theory VAT should be fairly straightforward, but in reality it frequently causes confusion over who needs to be registered and what can be claimed. Quite simply VAT is a tax that is charged by VAT-registered businesses on most goods and services. Generally speaking, when a VAT-registered business is charged VAT when it buys goods or services, it can reclaim the VAT. Basically, these businesses are acting like tax collectors - charging VAT, collecting the money and, minus VAT they've incurred, handing it over to HMRC.
Businesses have to register for VAT when their taxable turnover for any 12-month period exceeds the VAT registration threshold, which is currently £77,000. However, if the business will only go over the threshold temprarily an exception can be requested from HMRC.
Also, if a business takes over another business that is already VAT registered then it will be required to register. This is based on the assumption that the joint income of the businesses will be over the threshold.
While these are the main reasons for compulsory registration, there are others. For example, if you think your business’ turnover will exceed the threshold within just 30 days or if you are trading outside of the UK.
NOTE: There are late registration penalties and/or failure to notify penalties along with surcharges and interest for late payment.
The financial side of running a business can be very scary to those just starting out. Entrepreneurs coming from the security of an employer who sorted all the tax and national insurance are often daunted by the prospect of taking on these tasks. This is an important topic, which any business owner must take very seriously.