Being VAT registered is compulsory once a business has a turnover above a certain level set by HMRC (this is currently 85,000). However anyone can choose to voluntarily register. Whether or not you choose to do this will depend upon your business and if it would be to your advantage. Once a busines is registered VAT MUST be charged on all non exempt products or services sold. The VAT you pay on any allowable purchases can then claimed back against the VAT owed to HMRC from sales. Please see the example below to get a better basic idea of how this works. It is important that you get a VAT receipt/invoice for every purchase made where possible. Without these receipts and invoices you will not be able to reclaim the VAT.
Example:
Your business makes weekly sales of £6,600 (of which £1,100 is VAT) This means you owe HMRC £1,100
In the same week your business makes vatable purchases of £2,520 (of which £420 is VAT) This means you can claim back £420 from HMRC
However they do not pay this direct. Any claimable VAT is deducted from the amount you owe them, so:
Amount you owe them = £1,100
Amount claimable = £420
New amount you owe to HMRC = £680 (£1,100 – £420)
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