Did you know that there are lots of business owners out there choosing to apply for a voluntary VAT registration even though the VAT registration threshold is £85,000?
So why would a business choose to pay tax and increase their administration? What are the benefits? Here I explain more about voluntary registration as well as sharing some of the pros and cons of choosing to register, even if you don’t have to.
I’ve updated this on 21 October 2020 for changes in the latest legislation
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 are some of the advantages:
You Business Will Look Larger
Because businesses with a turnover of more than £85,000 must register for VAT in the UK, one of the major advantages of applying for a voluntary VAT registration is that it will create the impression to 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 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 for new businesses.
Here’s an example to explain:
Karan has become self-employed offering consultancy services. She needs to buy a computer along with office equipment to get her business up and running, which all adds up to £7,000 plus VAT. She has decided to apply for a voluntarily VAT registration 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 repayment 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 for what purpose.
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 Disadvantages 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, especially if you have regular VAT repayments.
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 are an Etsy seller or AirBNB host for example and deal with consumers or individuals who cannot claim back 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.