I am not confusing anything, you need a good accountant.
Yes you are confused. Having a good accountant is not helpful if you don't understand what he tells you, or if you ask the wrong question
I've had many occasions over the years where someone has "sworn blind" that some fact or other is true - while in fact what they are saying may be true, but not in the context of the discussion because it was the answer to a different question
BTW - I don't use an accountant, I do my own books, and have done for the couple of decades I've been in business. But then the "mechanics of how things work" is something that interests me and so I've been able to keep up with how tax works (as far as it affects me). I can well understand that many people will see things in a different light and have to hand over the shoebox of receipts
to an accountant to deal with.
VAT registration (or not) does not affect your ability to offset input & capital costs against income. It does not even affect how much you can offset - if not registered then your input cost is the VAT inclusive price, if you are registered then your input cost is the VAT exclusive price but you'll have reclaimed that VAT anyway - the split between how things are claimed is different, but the net effect is the same.
Examples :
Capital items. You buy a tool for the business which costs £100+VAT.
If VAT registered you reclaim the £20 VAT, then put £100 in the accounts as a capital item to either write down according to general accounting rules, or for most small businesses, claim under Annual Investment Allowance. Assuming AIA, then you fully offset all the £120 you paid out in the one tax year.
If not VAT registered, you put the whole £120 against AIA - again fully offsetting the £120 in the current tax year. If you reach the amount where being VAT inclusive affects being able to set it against AIA then you'll (in most cases) have passed the VAT registration threshold anyway.
Revenue costs. You buy materials for £100+VAT, then do a job where you charge £200 for your labour.
If VAT registered then you reclaim the £20 input VAT, charge the customer £300+VAT (i.e. £360), hand over £60 to the tax man, and put the £100 and £300 in your accounts for P&L purposes. You'll pay tax on £200.
If not VAT registered then you'll charge the customer £320 (the £120 materials cost plus your £200 labour), and you'll put £120 and £320 in your accounts. You'll pay tax on £200.
From the PoV of your customer, if they are VAT registered then it's better if you are VAT registered - the customer (after doing the VAT shuffle) pays £300 vs £320 if you aren't registered.
If the customers are not VAT registered, then it's better if you are not VAT registered - the customer pays £320 vs £360 if you are. And the taxman takes £40 less in VAT.
Of course, in reality you may be VAT registered but competing with non-VAT registered competitors. So you might have to drop your "inc VAT" price to £320 to keep the job.
Your calculation is now that you have input costs of £100, and output value of £266.67 ex VAT. So now you've only made £166.67 on your labour and the tax man takes £33.33 (net, £53.33 on your bill, less the £20 you reclaimed) vs the £20 he'd have taken if you weren't VAT registered.
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Yes of course you can, but being VAT registered all of those items have another 20% you claim back.
But if you aren't VAT registered, you simply claim back the VAT inclusive price. See above, zero difference unless you hit the limit for AIA.
