How voluntary VAT registration can benefit your business

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There’s already ample legal and financial responsibilities when it comes to running your own small business in the UK, regardless of whether you do so as a sole trader, partnership or limited company, so the idea of voluntary VAT registration may not be at the forefront of your mind.  Nevertheless, many businesses do choose to voluntarily register for VAT for various reasons, often due to the benefits. This article will share how voluntary VAT registration can benefit your business, as well as consider the drawbacks.

What is VAT?

In the UK, VAT stands for Value Added Tax and it is a tax that is added onto the sale of most goods and services. You may not notice paying for VAT day to day, unless you pay careful attention to your receipts, as most goods are priced inclusive of VAT. However, there may be times when you come across goods or services which are explicitly marked as priced exclusive of VAT. For example, some wholesalers will display the price of goods exclusive of VAT on the shelves in the warehouse, and then VAT will be added at the till and shown on your receipt. This is because they are predominately served to other businesses that may be able to reclaim VAT, but also accessible to the general public. If you’re not a VAT registered business, you won’t be able to reclaim the VAT payment.

What is the VAT threshold?

The VAT threshold has recently increased to £90,000 from £85,000 as of 1 April 2024. It means that it becomes legally mandatory to register for VAT once any business reaches a turnover of £90,000 a year. The exception to this is where your business falls within an exempt industry such as certain educational institutions, healthcare services or financial services. You may also be able to avoid compulsory VAT registration where you can demonstrate that your business will only temporarily be at the VAT threshold but not maintain or exceed it long term due to exceptional circumstances.

When do you have to register for VAT?

You must register for VAT where your turnover is £90,000 or more across any rolling 12 month period. The deadline to register for VAT is within 30 days of the end of the month that you reached the threshold. For example, if during the period of 1 February to 8 September your business turnover reached £90,000 then you will have until 30 October to register for VAT. If, however you are aware that your turnover will reach £90,000 within the next 30 days, you must then register within those 30 days. This may occur where you win a contract to provide services for £50,000 but have yet to fully invoice for the amount. Regardless, as soon as you are aware of the above you will need to make sure you register in time.

How does voluntary VAT registration benefit your business?

You do not need to wait until you reach the VAT threshold in order to register your business for VAT. Many small businesses will choose to voluntarily register for VAT to take advantage of the benefits:

• Be able to reclaim VAT. When you are VAT registered, you must begin to charge VAT on your goods and services (unless you are partly-exempt). You will still be continuing to pay VAT on any goods and services you receive. The benefit of being VAT registered is that you will then be able to reclaim VAT on any VAT-inclusive payments you have made. For example, if you run a hair salon and you have to regularly purchase hair dye, you will have to pay the VAT on the products. Once you are VAT registered, you’ll be able to reclaim the VAT paid and therefore cut your stock costs.
• Be able to retrospectively reclaim VAT. Not only will you be able to begin reclaiming VAT on your purchases, you’ll be able to backdate any VAT claim up to 4 years where the item in question is still being used in the business. For example, as a start-up, you may have purchased equipment such as computers, printers, scanners etc and paid VAT on these. If you then later decide to become VAT registered, you’ll be able to reclaim the VAT paid so long as they are still being used in the business.
• Attract VAT-registered customers or clients. Many VAT registered businesses will often choose to do business with other VAT registered businesses, and some larger companies may only exclusively work with VAT registered businesses. This is perhaps mostly due to the fact that they’ll be able to recover the VAT paid for your products or service. When a VAT registered business purchases goods or services from a non-VAT registered business, there is nothing to reclaim and the whole cost must be accounted for as business expenditure if allowable. Becoming VAT registered may therefore open a larger pool of clients or customers to your business.
• Offer confidence to prospective parties. When you become VAT registered, your business will receive a unique VAT registration number. This must be displayed on your website (if you have one) and on your invoices and receipts to clients or customers. By openly displaying your VAT registration number to the public, which can be cross-referenced online on the .Gov website, you give a reputable impression of your business. This is because people will be aware that you will need to comply with regular accounting and VAT filing. This cannot only give confidence to attract new potential clients and customers but can also be seen as positive assurance to lenders or investors.
• Allow you to disguise your business turnover. By voluntarily registering for VAT, you can disguise if your business turnover is below the £90,000 VAT threshold. Most people assume that a business is VAT registered because they are required to do so. Voluntary VAT registration is therefore a clever tax planning strategy that can give the impression that you are a larger or more established business – which can in turn give people more confidence to do business with you.
• Requires that you maintain accurate records. Once you are VAT registered, you will need to submit regular VAT returns to HMRC which declare how much VAT you have collected through the sales of your goods or services and allows you to reclaim any VAT you have paid. Doing this will encourage you to pay careful attention to your business finances consistently and therefore allow you to make better informed business decisions.

What are the drawbacks of voluntary VAT registration?

Before jumping to voluntarily register for VAT, you should also consider the drawbacks in order to determine whether it’s the right decision for your business. For some smaller businesses, registering for VAT early may not be so suitable due to the inconveniences:

• It will increase your workload. As mentioned above, when you are VAT registered, you will need to submit regular VAT returns (usually quarterly). Undeniably, this means extra work whether that’s keeping your receipts and invoices in order or uploading them digitally to be reported on. If you’re just starting your own business and do everything yourself, it can seem like considerably more work, especially when there are set deadlines to which the consequence of missing them repeatedly means penalties.
• There will be an additional cost for your business. Becoming VAT registered will incur additional costs. If you have decided to file your VAT returns yourself, then you’ll have to invest in HMRC-approved cloud accounting software that is compatible for Making Tax Digital (MTD). There are free software options available, but you may prefer to use paid for subscription software which often has a much more user-friendly interface and functionality. On the other hand, if you choose to hire an accountant to help you with your VAT returns, you’ll have to bear in mind their fees. Nevertheless, both options are tax-deductible for your business and worthwhile investing in.
• Your prices may become less competitive. Once you’re VAT registered, you’ll be obliged to add VAT on top of the price of all your non-exempt goods and services. If a majority of your clients or customers are non-VAT registered then this may make you less appealing as they’ll only see that you have increased your prices.
• You could still find yourself in a position where you are unable to reclaim any VAT. This will occur where your suppliers are not VAT registered, and therefore you will not benefit from reduced costs. It can also be difficult to switch suppliers, especially where you have entered into a contract for a fixed term.
• You may struggle with an unbalanced cash flow. Following from the point above, it can be challenging to adjust your cash flow if you are charging more VAT on your goods and services than you are incurring from your purchases. This could mean that you will have a large VAT bill to pay but have very little VAT to recover. However, this does not mean that it will make your business less profitable and a good accountant can help you understand and manage your cash flow efficiently.

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a government initiative that aims to gradually transition the UK’s tax system so that records are stored digitally enabling tax returns to be submitted online, more frequently, and closer to real time which will help reduce the tax gap. The proposal was announced in 2015 and the first phase of the scheme began in 2019 which saw the first VAT returns being submitted digitally. Now, any new business that registers for VAT will be automatically enrolled onto the MTD scheme.

What does MTD mean for VAT returns?

MTD means that businesses will no longer submit a VAT return manually through HMRC’s old portal. Instead, as a result of the MTD regime, VAT returns will be submitted directly to HMRC through approved software. In order to do this, it will also mean that all your VAT records must be stored digitally so that the software can access them to prepare and calculate your VAT return. Not only does MTD mean the more accurate organisation and calculation of your VAT return, but it will also enable you to submit more frequent quarterly VAT returns. This will allow you to reclaim any VAT due to be repaid to you much quicker.

How to register for VAT in the UK?

Registering your business for VAT is a straightforward process which you can do yourself online at HMRC’s website. If you are unable to register online, you will also have the option to do so by post using a paper form.

Can I cancel my voluntary VAT registration?

You can cancel your voluntary VAT registration at any time so long as your annual business turnover remains below £83,000 – this is the VAT deregistration threshold. You must also be able to assure HMRC and provide satisfactory evidence that you will not reach this threshold within the next 12 months. To deregister from VAT, you can apply to do so through your online VAT account, or if you are unable to do so, you also have the option to cancel your voluntary VAT registration by post using a paper form. You may have to complete a final VAT return for the period covering up to your deregistration date.

You must wait for HMRC to confirm your VAT deregistration which will usually come by post within 3 weeks. Only then can you stop charging VAT on your goods or services and remove your VAT registration number.

Get help with your VAT returns

If you need help with your voluntary VAT registration or choosing the right VAT scheme for your business, then our friendly team of accountants is on hand to assist. Get in touch by using our contact form.