I’ve updated this on 23 March 2020
Even if your earnings are below the VAT registration threshold you may still be considering a voluntary VAT registration.
But with registering for VAT brings extra responsibility, especially with the introduction of making tax digital, is it really worth it? And what are the financial benefits?
Voluntary VAT registrations are more commonplace than you may realise. Here I explore more about it and help you to consider some fo the pros and cons of choosing to register, even if you don’t have to.
This guide is for sole traders and small businesses. The VAT rules are the same whether you are a Limited Company or Sole Trader.
What is a Voluntary VAT Registration?
A voluntary VAT registration refers to a sole trader or small business that chooses to register for VAT even though they have no legal obligation to do so.
How Much Can You Earn Before Registering for VAT?
You are legally required to register for VAT once you earn more than £85,000.
For VAT purposes, earnings actually mean taxable turnover, because depending on your business, some of the things you sell may be exempt from VAT like insurance or children’s clothes.
You’ll also need to review your taxable turnover on a 12-month rolling basis. There is not a fixed time timeframe for you to check against.
That way if at any time, you can see your taxable turnover going over the threshold your need register for VAT immediately.
What are the Benefits of a Voluntary VAT Registration?
The are pros of a becoming VAT registered, including some financial gains.
You Business Will Look Larger
Since anyone who earns more than £85,000 must register for VAT in the UK, a voluntary VAT registration will give your customers and competitors the impression that your business has a larger turnover than it really does.
You Can Claim Back VAT
Regardless of your turnover, you’ll be able to claim back VAT on most of the things you pay for.
That could generate a tax refund, which is often helpful for cash flow if you are just starting out.
Karan is starting out as a sole trader offering consultancy services.
She had to buy a computer and office equipment to get her business started which totalled £7,000 plus VAT.
She decided to voluntarily register for VAT and in her first VAT quarter billed her clients £3,000 plus VAT as things were a little quiet during the start-up phase.
By voluntarily registering for VAT she generates a VAT refund of £800, calculated like this:
Just be careful, if you have lots of tax refunds, HMRC may contact you to assess the viability of your business.
You Can Claim Back Historic VAT
If you paid for expenses setting up your business, once you are VAT registered you may be able to claim back historic VAT on those setup costs.
You Avoid EC VAT
If you buy goods from suppliers in the EC, then they may have to charge you local VAT unless you can provide them with a UK VAT number.
What are the Downsides of a Voluntary VAT Registration?
Becoming VAT registered isn’t for everyone, here are the cons of doing so.
Delayed VAT Repayments
HMRC may hold your VAT repayment until you answer certain questions so they can assess the validity of your claim. This is especially true if you have regular tax refunds.
If you sell to the general public or small businesses who are not VAT registered, then you’ll need to add 20% to your prices. That means you could become uncompetitive. Or if you are unable to raise your price to cover the VAT, you will need to pay it from what you sell which will impact your profit margin.
All VAT-registered businesses are required to keep digital books, under the rules of Making Tax Digital.
That means using an approved bookkeeping software such as Quickbooks to calculate and submit quarterly VAT returns.
Depending on your schedule you may have to get the help of a bookkeeper or accountant to help you manage your VAT. This attracts extra costs which may or may not be offset by the VAT you can claim back.
Depending on the size of your business you may not want to commit to this level of administration if it isn’t necessary.
Should You Voluntarily Register for VAT?
There are lots of pros and cons when it comes to voluntarily registering for VAT.
If you are a sole trader it may create too much admin for you.
But if you are a small but growing business, being VAT registered could given you some much-needed cash flow.