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I have recently had to become VAT registered about 5 months ago so im fresh on this, If your business turnover is more than the VAT threshold (£64,000 from 1 April 2007) you will normally have to register for VAT. Even if your turnover's below the threshold it might benefit your business to register voluntarily.
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Just to add, if you pay VAT you can opt to pay 10% to the VAT man instead of the 17.5% collected.
The deal is you charge customers 17.5% but pay the Vat man 10%
BUTyou cannot claim any VAT back from expenses, purchases etc. This can work out very well if you purchase few goods. I have been doing this for the last 3 years.
Best advise is, if your not sure speak to the VAT/Tax man they can be a great help. If you ignore them and dont pay it or speak to them about it, they will slaughter you when they catch you
Edited to add: Dam it, just realised ive repeated myself from a few posts above.
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I pay 40% tax on my earnings outside of the internet so can't avoid it.
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Can you take on a partner to double the tax relief ?