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I currently work full time for a private company and am considering on starting up my own online software company by forming a private limited company. I had a few questions:

  1. I've noticed that the current VAT threshold for VAT registration is currently set at ~£70k, does this threshold take into consideration personal income from my full time job? It is likely I will exceed this limit if this includes both my salaried job income and the turnover from the registered company, therefore this is the reason for asking the question.
  2. Is it mandatory for private limited companies to be VAT registered?
  3. I personally would like to avoid VAT registration at present merely because I would see no advantage for my business except for a professional image. I will be running an online software company which will only have a few minor overheads, therefore I see no benefit in claiming a small amount of VAT. Can anyone see any pitfalls in this approach?

Regards, Ben

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Consider revising your topic line. Seems you ask more about taxes than you do about UK Startups. :-) – John Sjölander Dec 21 '10 at 14:19

2 Answers

up vote 6 down vote

Your personal income is separate from your company's revenue. You and your company are separate legal entities.

The VAT threshold applies to your company (self-employed traders also have to consider VAT but that doesn't appear to be relevant in your situation if your other job is not self-employment).

You are only obliged to register for VAT if you reach the threshold. Below the threshold you may choose to register voluntarily. This can be advantageous as you can claim back the VAT on your business expenses. It depends whether the money you can claim back is more than the money you lose by having to include VAT in your prices.

If you sell to other VAT registered businesses, they won't care about the VAT in the price as they too can claim it back. In this case it's probably advantageous to register. If you sell to consumers, they can't claim back the VAT so you'd probably want to avoid increasing the price that they pay until you have to.

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Great detail! Upvote – Frank Dec 21 '10 at 19:18
Hi Dan, Thanks for your answer, I thought this might be the case with my own personal income and the company's income. The last paragraph is very handy to know, as I didn't consider this for VAT registration. It will be a split 50/50 between businesses and consumers. In regards to company expenses there would be very little, therefore initially I didn't see the advantage of VAT registration. – Ben53 Dec 22 '10 at 10:23
up vote -1 down vote

Ben, I might be partial but have you considered setting up in the States or somewhere a bit more tax friendly? Unless your market is the UK market, or your startup is limited in some way strongly consider setting up in the USA.

As a UK citizen you will be taxed on your income in the US. But our tax system is still a bit lower, and this approach gives you greater access to US companies.

Just a thought.

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Hi Frank, Thanks for your reply. I haven't really considered anything like this, but I'm not really sure what direction to head considering my lack of experience in starting up companies. If the US can provide a lower rate of tax for my business then it sounds like an ideal solution for myself. The only problem I forsee is that if I discussed this idea with a UK accountant they would be against this idea. Wouldn't I have to source all of my resources from the US, e.g. accountant? – Ben53 Dec 21 '10 at 14:50
I actually anticipate the majority of my clients to be from the US. Not sure if this will make much difference to my business venture? – Ben53 Dec 21 '10 at 14:54
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@Ben53 If you're incorporated in the UK, you only need to collect VAT from customers in the EU, so you won't need to add VAT to the price when selling to Americans (see hmrc.gov.uk/vat/managing/international/exports/goods.htm). But if you are VAT registered, you can still claim a refund on VAT you've paid. – Dan Dyer Dec 21 '10 at 19:07
Your UK accountant will probably give you the best guidance on two fronts. One how your personal income and tax situation will be affected by your business, and 2 some guidance on incorporating offshore. In the USA, although we complain about taxes, corporate taxes are capped at 25%. We also have some friendly tactics which allow money to be bounced between two companies, therefore not taxed while it acrews. The most attractive part of the US would be if you are targeting US customers. Probably want to use a CDN on the tech front to make sure the site performs fast for both marktets. – Frank Dec 21 '10 at 19:17
Dan - thanks for the link, I've been doing some research on the Government website but have been overwhelmed by all of the information available. Your answers are very clear and straight to the point! Appreciated! – Ben53 Dec 22 '10 at 10:27

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