I’ve updated this on 21 October 2020 for changes in the latest legislation
It is compulsory for businesses to register for VAT once their turnover exceeds £85,000, but did you know there are lots of businesses owners out there choosing to apply for a voluntary VAT registration?
So why would a business choose to pay tax and increase their administration? What could be so beneficial? Here I explain more about it and share some of the pros and cons of choosing to register, even if you don’t have to.
The Benefits of a Voluntary VAT Registration
Being registered means you need to start submitting VAT returns so the benefits need to outweigh the extra admin burden. Here’s some of the plus points:
You Business Will Look Larger
Because businesses with a turnover of more than £85,000 must register for VAT in the UK, apply for 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, once successfully registered 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 especially if for new businesses that are paying for set-up costs.
Karan is starting out as a sole trader offering consultancy services. She needs to buy a computer and office equipment to get her business up and running, which adds up to £7,000 plus VAT. She has 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, which is less than the costs she has paid for.
By voluntarily registering for VAT she generates a VAT refund of £800, calculated as follows:
You Can Claim VAT You Paid for Prior to Your VAT Registration
Once you become VAT registered you may be able to claim VAT back on things you bought prior to your registration date. What you can claim depends on the types of things you have bought and you can find out about how far back can you claim VAT here.
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. And if you supply services to other EC countries then you may be able to avoid charging them VAT under the rules of the reverse charge scheme.
What are the Drawbacks of a Voluntary VAT Registration?
Becoming VAT registered isn’t for everyone, here some of the drawbacks of doing so.
Delayed VAT Refunds
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 can simply add on 20% to your current pricing, then that’s great because your pricing and margins will remain unaffected. However, if you deal with consumers and individuals who cannot reclaim VAT then you may need to look at how you price for your goods and services.
For example, if you run a candle store on Etsy and you need to register for VAT you may not be able to add 20% to your pricing because you will become uncompetitive in the market place and taking 20% out of your sales price may destroy your margins.
You may need to give serious thought to how your VAT registration will affect your business and check out VAT schemes available which may reduce the impact.
When you go VAT registered you’ll need to do your bookkeeping on an HMRC software like Quickbooks Simple Start and submit regular VAT returns, as well as managing VAT Payments on top of your regular cash flow. I’ve written a separate guide to going VAT registered which contains the things you’ll need to think about once you are registered for VAT.
See all my VAT Guides
New Here? Learn how to set up the financial side of your business with these easy to understand guides and resources:
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
- Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
- VAT Guides – From registration to de-registration, VAT schemes and thresholds, these guides will take you through the basics every UK small business owner needs to know;
- Invoice Template – Free template and step-by-step guide so you can get paid by your clients.