VAT registration provides a huge range of benefits to businesses of all sizes, but there is a great deal of administration involved. Whether your business is legally required to register for VAT or you’re 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 throughout this blog.
VAT registration is required when taxable turnover (i.e. overall takings, not ‘profit’) for the previous 12 months exceeds £85,000 (2020-21 threshold) or is expected to exceed this figure in the next 30 days. Voluntary VAT registration is an option for smaller businesses with a taxable turnover below £85,000.
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.
The advantages of voluntary VAT registration
The threshold for VAT registration in the UK is currently set at £85,000 for the 2020-21 tax year. This may seem like a lot of income, but it is important to remember that this figure refers to ‘taxable turnover’, which is the overall income generated from all sales, not simply the profit made from those sales.
This means that many small businesses and limited companies meet the criteria for compulsory VAT registration. However, whether compulsory or voluntary, VAT registration offers many benefits:
- VAT can be applied to the sale cost of almost all goods and services offered
- VAT can be reclaimed on most goods or services purchased from other businesses
- Small businesses can give the appearance of being bigger and more established. This can be very appealing to clients, lenders, investors, and suppliers because they will assume the company’s turnover is more than £85,000
- 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 get involved with a business that is not VAT registered and, therefore, 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
The disadvantages of voluntary VAT registration
- 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
VAT registration can be completed online through HMRC. The process is quick and simple, but you must first sign up for HMRC Online Services or create a Government Gateway account.
It can take around 2 weeks for HMRC to process your VAT registration 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, but you can adjust your prices to reflect the amount of VAT that you plan to charge.
If it’s within your budget, it may be beneficial to appoint an accountant to 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 one 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.