VAT rules in the UK require a business to become VAT registered if its taxable turnover hits the £90,000 threshold in any rolling 12-month period, but you don’t have to wait until then. Some businesses prefer to register for VAT even though they don’t need to. Is this the right decision for you? Well, that depends.
Should I make a voluntary VAT registration?
Voluntarily registering for VAT is a big decision that will have lasting implications, so there are plenty of considerations. We’re not just saying that – we’ll go through them too.
Will VAT registration help your business be more tax efficient?
Nearly all of us pay VAT on the things we buy, but VAT registered businesses can claim this back (minus the amount they charge to their own customers over the same period of time).
If your business consistently pays out more VAT to suppliers than it collects on sales, registering for VAT will allow you to reclaim the difference on a regular basis.
For example
The things you sell are zero-rated for VAT, so although you need to charge VAT on your sales, you’re adding it at a rate of 0%. Nearly all of the supplies your business buys are subject to the standard rate of VAT at 20%.
When you add up all the VAT you paid and compare it to the total amount of VAT you charged over the same period of time, the amount you paid is always higher.
Registering for VAT will enable you to claim the difference between the two amounts.
Growing the business, and making an impression
Becoming VAT registered early helps a business prepare for future growth, whilst giving the impression of a much larger operation. For some customers, this is a reassuring sign which might give them more confidence. In fact some businesses will only work with other VAT-registered businesses, so it might be worth checking what’s the norm in your industry.
Record keeping for VAT
There’s plenty of record-keeping required for any business, so VAT registration will be an extension of this. That said, VAT-registered businesses must comply with Making Tax Digital (MTD) rules around keeping financial records digitally, and using special software to submit returns.
VAT and cash flow
While a businesses may benefit from early registration by reclaiming VAT, this might still cause cash flow issues. Sales might fluctuate, or a global pandemic might cause absolute chaos, making it hard to predict what the VAT bill will look like at the end of the year. Plus, just like paying your tax bill, you’ll need to remember to keep money aside to pay your VAT bill too!
VAT registration can also affect the price you charge, leading to some decisions to make:
- Keep the price to the customer the same, but the VAT due on the sale comes out of your profit instead
- Add the VAT on to the price, and risk losing some customers who don’t want to pay more
Learn more about using Pandle to make business accounting easier. Create a free account or use Pandle Pro for £6 a month.
