How to open a pizzeria on a shoestring: 8. Registering for VAT

This really deserves its own chapter, not because registering for VAT is complicated, but because it's a somewhat important decision that you must make early on as it will affect your prices and your finances.

Part 8

Registering for VAT

At the time of writing, the VAT threshold is £85,000, which means 30 days before you expect to hit this figure, you should register for VAT.

As explained, you can do this on your HMRC online portal. Interestingly you will be considered as registered from the date you apply, or if you are late in registering, from the date that you should have applied. This will have serious implications that you must discuss with your accountant. As usual you can find more info this subject on the Government website.

VAT Explained

I’ll try to explain this in simple terms, but you will need your accountant to run some numbers and advice you on this.

This exercise is only meant to demonstrate that the decision is not “black and white” and demands some careful consideration. Not registering for VAT from the outset could mean that you literally make an extra £9,000 in gross profits, although it may cause some headaches along the way.

You will be able to reclaim some VAT on goods (especially kitchen equipment) and services (like lawyers’ fees) that you purchased when you were not VAT registered (there are deadlines to respect).

If the gains of not being VAT registered are small, I would rather register for VAT (voluntarily) as soon as possible to avoid headaches later on.

For the purpose of this exercise, let’s assume the following:

• VAT is 20.
• You will hit revenues of £85,000 in four months, but because you’ll have to register for VAT at the end of month three, we’ll only use the first three months of trading.
• You will spend £12,000 + VAT on equipment and £1,500+VAT on Lawyers’ fees.
• As you will register at the end of month three, you will be able to recoup the VAT you paid on Equipment and Lawyers’ fees (£2,700).
• All installations, certificates, and bills are from VAT registered entities. The food you buy is zero rated (no VAT).
• You sell alcohol.
• You don’t pay VAT on your rent.
• Your food and beverage cost is 25%.
• We only include a few basic costs (for example salaries, rates etc. are not included).
• Your prices are the same whether you are VAT registered or not. It has to be this way. As sooner or later you will have to register for VAT, you must set prices like if you were registered otherwise at the point of registration your prices will suddenly go up by 20%.

In this case if you register voluntarily before starting trading you will make a gross profit of £19,343.75. If you register after opening, you make an extra £6,375 in gross profit. Plus, as you will be able to recoup VAT of £2,700, the total gains will be just over £9,000.

But please let me make this clear again, you will need to run these figures past an accountant!

Check out the next post of this series: 

• 'How to open a pizzeria on a shoestring: 9. Compliance'