You can choose to apply for a voluntary VAT registration even if your VAT taxable turnover is below the VAT registration threshold of £85,000. And many business owners choose to do this.
In this guide, I’ll explain more about voluntary VAT registration as well as sharing some of the pros and cons of choosing to register, even if you don’t have to.
Confused by VAT? Read this guide to find out more about What VAT is and How it Works
Table of contents
Updated 9 August 2021
1. What is a Voluntary VAT Registration
Uk businesses are legally required to register for VAT when their taxable VAT turnover reaches £85,000, however, a business can choose to register when their turnover is below this threshold. This is known as a voluntary VAT registration and is popular with many businesses.
2. What are 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 of registering voluntarily:
2.1 Your 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.
2.2 You Can Claim Back VAT
Once your business is registered for VAT, you’ll be able to claim back VAT on most of the things you pay for. That could generate a VAT repayment, which is often helpful for cash flow, especially for new businesses. Here’s an example:
Karan has registered as 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:
| Net | VAT (20%) | Gross | |
| Sales | £3,000 | £600 | £3,600 |
| Computer equipment | -£7,000 | -£1,400 | -£8,400 |
| VAT repayment | £800 |
2.3 You Can Claim Back VAT You Have Paid for Prior to Your VAT Registration
Once you become VAT registered you may be able to claim the 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 – read this guide to find out how far back you can claim VAT.
2.4 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.
3. What are the Cons of a Voluntary VAT Registration?
Becoming VAT registered isn’t for everyone, here are some of the drawbacks of doing so:
3.1 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.
3.2 Pricing Issues
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 erode your gross profit margins.
There are VAT schemes available which may reduce the impact of a VAT registration.
3.3 Administration
Going VAT registered brings with additional reporting to HMRC and you’ll need to do your bookkeeping on an HMRC approved bookkeeping system, like Xero so you can submit your VAT returns through your software straight to HMRC (these rules are known as making tax digital).
3.4 Cashflow
You’ll need to ensure you can pay your VAT bill on time otherwise you could face penalties. A voluntary registration can affect your cashflow, so you’ll need to make sure you have a proper system in place to help you manage your cash.
4. How to Apply for a Voluntary VAT Registration
You’ll need to apply to register for VAT online. As part of your application, you’ll need to let HMRC know why you are applying and you can notify them that this is a voluntary VAT registration.
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