VAT registration is a problem for small businesses who sell to the general public.  When annual turnover exceeds £85,000, they must register for VAT and pay 1/6th of gross sales to HMRC.  However, you can avoid/delay registration:

  • Restrict annual turnover to less than £85,000 – by limiting customers, closing up for holidays etc. but this is a bit desperate and not a long-term
  • Incorporate into a Limited Company – if a sole trader becomes a limited company (or vice versa), this resets the turnover for VAT registration purposes to zero – buying time before having to register – but if the threshold is exceeded in any 12 month period whilst a sole trader, prior to becoming a company, you will be forced to register for VAT.
  • Split the business into two Limited Companies – where one or both parts of a business have income below the VAT threshold – thus saving a lot of VAT. It’s vital that each part is autonomous, with separate costs, staff, premises, literature etc. and that there are sound reasons for the split (say geographical or a new market). But, if it is for an artificial reason, HMRC will treat sales for both businesses as though there is only one – meaning that both may need to VAT register.