In this blog, we discuss voluntary VAT registration and the advantages and disadvantages associated with this course of action. For example, VAT registration can provide a significant range of benefits to businesses of all sizes; however, there is a good deal of administration involved.
If you are considering voluntary VAT registration, it’s important to understand the various pros and cons and the impact it can have on your business, which we will explain.
What is VAT?
Value Added Tax (VAT) is charged on the majority of goods and services provided by VAT-registered businesses in the UK. It also applies to certain goods and services imported into the UK from the EU and non-EU countries.
VAT-registered businesses add VAT to the sale price of goods and services they sell to both commercial and non-commercial consumers. Generally, these businesses can also reclaim VAT paid on the goods and services they buy.
Businesses that are not VAT registered cannot reclaim any of the VAT they pay. You have to be registered for VAT to be able to charge or reclaim this tax on anything you buy or sell.
A business is legally required to register for VAT when taxable turnover (i.e., overall takings, not profit) for the previous 12 months exceeds the VAT registration threshold of £85,000 (2022/23 tax year), or if it is expected to exceed that figure in the next 30 days.
What is voluntary registration?
Many small businesses with a turnover of less than the VAT registration threshold decide to become VAT registered on a voluntary basis before they are legally obliged to register for VAT. They choose to do this for various business reasons which we will discuss below.
The advantages of voluntary VAT registration
Whether voluntary or compulsory, VAT registration offers many benefits:
- VAT can be reclaimed on most goods or services purchased from other businesses
- If your customers are VAT registered businesses they will be able to reclaim the VAT from HMRC. Your prices will still be competitive and you can recover the VAT on your costs
- Small businesses can give the appearance of being bigger and more established. This can be very appealing to customers, lenders, investors, and suppliers because they will assume the company’s turnover is in excess of the VAT registration threshold
- VAT-registered businesses are given a VAT number. This can be displayed on invoices, letterheads, websites, and other forms of business stationery. Again, this can be appealing to other firms, many of whom may not be willing to do business with a non-VAT registered entity because it is considered too small
- Voluntary registration can be backdated by up to four years if sufficient evidence can be supplied to HMRC. This means that a business may be able to reclaim VAT paid on equipment that it is still using
- VAT registration will force you to keep more accurate records, which will ultimately be beneficial to the running of your business
The disadvantages of voluntary VAT registration
Whilst VAT registration offers a number of benefits, there are also some drawbacks to be aware of:
- VAT could hamper the appeal of goods and services to customers who are not VAT registered, particularly if the final cost of the sale is deemed unreasonable or overpriced
- Businesses could end up with a large VAT bill from HMRC if they generate more VAT from goods and services sold than the VAT paid on goods and services bought from other businesses
- Extra paperwork and more administration are unavoidable consequences of VAT registration. Businesses need to keep all VAT invoices and receipts, maintain VAT accounting records, and file VAT returns every quarter (i.e., every three months)
How to register for VAT
If you decide you want to register your company for VAT, the application can be completed online at GOV.UK. By doing this, you will register for VAT, and also create a VAT online account (also known as a Government Gateway account). You will need this to submit your VAT Returns to HMRC (see below).
Alternatively, 1st Formations provides an affordable VAT Registration Service at a cost of £39.99 plus VAT. The service includes:
- the preparation and submission of your VAT registration application to HMRC
- access to a VAT registration expert to answer your questions
- confirmation of your VAT registration number
- instructions on how to create your own HMRC Government Gateway account to activate your VAT registration online
It can take around 3 weeks for HMRC to process your application. During that time, you should start keeping records, accounting for VAT, and retaining all relevant invoices and receipts.
You cannot, however, start charging VAT or showing it on any invoices until HMRC sends you a VAT registration number.
However, you can adjust your prices to reflect the amount of VAT that you plan to charge, and then provide VAT invoices to customers after you receive your VAT number.
If it’s within your budget, it may be beneficial to appoint an accountant to prepare and submit VAT returns and handle VAT affairs on your behalf.
VAT Returns are normally completed online for every 3-month VAT period. These returns must be delivered to HMRC within 1 month and 7 days after the end of the VAT period.
VAT payments must be made to HMRC electronically. The deadline for paying VAT is usually the same as the deadline for filing your VAT Return.
So there you have it!
We’ve covered the concept of voluntary VAT registration and the associated advantages and disadvantages. We have also touched on how to register a business for VAT, and VAT Returns
Whatever direction you choose with regards to VAT registration, we would always advise you to seek professional advice from an accountant.
If you have any questions about what we’ve covered, please ask in the comment section below and we’ll be sure to get straight back to you!