VAT Registration is legally required when taxable turnover (i.e. overall takings, not ‘profit’) for the previous 12 months exceeds £85,000 (2019-20), or it is expected to exceed this figure in the next 30 days.
Voluntary VAT registration is optional for any small business with a taxable turnover that is not expected to exceed £85,000. It can be really beneficial to do so. There are a number of factors to consider before voluntarily registering, all of which we will explain in more detail throughout this blog.
What is VAT?
Value Added Tax (VAT) is charged on the majority of goods and services provided by VAT-registered businesses in the UK, as well as certain goods and services imported from non-EU countries, and those imported into the UK from other EU countries. VAT-registered businesses add VAT to the sale price of goods and services when they sell to commercial and non-commercial consumers.
They are also usually able to reclaim the VAT they have paid when buying goods or services. If they are not registered for VAT, they cannot reclaim any of the VAT they pay. You have to be registered for VAT to charge or reclaim it on anything you sell or purchase.
The advantages of voluntary VAT registration
The threshold for VAT registration is currently set at £85,000 for 2019-20. 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.
For this reason, many small businesses and limited companies are legally required to register for VAT. The benefits of VAT registration, whether necessary or voluntary, are many:
- 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, which can be very appealing to clients, lenders, investors and suppliers, who will assume their turnover is more than £85,000 because they are VAT registered.
- 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 to be small.
- Voluntary registration can be backdated by up to four years if sufficient evidence can be supplied to HMRC, which means a business may be able to reclaim VAT paid on equipment 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 administration is an unavoidable consequence of VAT registration. Businesses will require keeping all VAT invoices and receipts, maintain VAT accounting records, and file VAT returns every quarter.
How to register for VAT
VAT registration can be completed online with HMRC. The process is quick and simple but you must first sign up for HMRC Online Services or the Government Gateway. It can take around 2 weeks for HMRC to process your application, so you must ensure you start keeping records, account for VAT, and keep all relevant invoices and receipts.
However, you cannot charge VAT or show it on any invoices until HMRC sends your VAT registration number, but you can adjust your prices to reflect the amount of VAT you plan to charge. If financially feasible, you can 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. They 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.