In the UK, registering your business for VAT remains voluntary until your turnover exceeds £85,000, so should you electively register for VAT before reaching this threshold or hold off until VAT registration becomes mandatory?
In this brief guide to voluntary VAT registration, we explore the pros and cons of becoming VAT registered, to help you decide whether opting in is the right choice for your business.
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Should you register for VAT early?
While EU businesses have no choice but to register for VAT, in the UK, newly incorporated companies – and sole traders – have the freedom to decide whether or not to become VAT (Value Added Tax) registered. In fact, registering for VAT only becomes mandatory once your taxable turnover meets the VAT threshold – which, at the time of writing, is set at £85,000.
Given that VAT declaration is voluntary for companies earning below this threshold, why is it that some businesses choose to electively pay VAT before they have to? The answer is a simple one – being VAT registered has its benefits. If it didn’t, there wouldn’t be an incentive for people to register for VAT early. However, being VAT registered also has its downsides. And therein lies the dilemma.
The decision of whether to opt into VAT before you need to comes down to whether the benefits of doing so offset the negatives. So, let’s explore the arguments in favour of, and against, becoming VAT registered.
The benefits of being VAT registered
- You can claim back the VAT you pay out
The biggest benefit of being VAT registered is the chance to claim back the VAT you pay out. This can be especially beneficial in the early years of launching your business when you’re likely to have higher outgoings than turnover.
If you need to invest in stock or assets, for example, technology or furniture, being able to claim back the VAT you’re charged on these items is a great way to improve your cash flow and offset some of these costs.
- It gives you credibility
Self-registering for VAT is a great way to boost the profile and credibility of your company. It suggests that your business is professional, law-abiding, and established, and builds the perception that you’re trustworthy and legitimate.
This can help you to get a foot in the door with other companies you want to go into business with, as well as to reassure customers that you’re the real deal.
The downsides to being VAT registered
- Customers will have to pay more for your products
Being VAT registered means you have to add VAT to your sales invoices, potentially making you more expensive than your competitors. This could increase the total cost of doing business with you, potentially causing you to lose out on some sales and bookings.
This isn’t such a negative if you’re trading with other VAT-registered businesses as they’ll be able to claim the VAT back, but it does mean that non-VAT-registered businesses and the general public will have to pay the VAT out of their own pocket.
- You’ll need to appoint a VAT accountant
Preparing VAT returns is much more complex than preparing an annual tax return. For starters, VAT returns need to be filed every quarter, and you have to submit a return even if you don’t owe any VAT nor need to claim any back.
You also need to keep accurate records of your VAT transactions – both what you’ve paid out and what your customers have paid in – and you have to file your returns digitally using HMRC-approved tax software. Failure to file correctly or on time could also result in a penalty fine.
In short, being VAT registered means you’ll need to pay an accountant who offers a VAT Returns Service to make the submissions for you. While this will save you a lot of stress, it will also come at an additional cost to your business so you’ll need to work out whether the financial outlay is worth the savings you stand to accrue.
- You might alienate clients in some sectors
There are some instances where becoming voluntarily VAT registered might actually shoot you in the foot. A prime example is if your core customer base is VAT exempt, as is the case with the healthcare and property sectors.
VAT-exempt businesses aren’t able to claim back VAT but if you’re VAT registered you still have to charge it to them. This could jeopardise your ability to convert customers in these sectors, so if your main clientele is VAT exempt it may make sense to hold off from becoming VAT registered until it becomes mandatory.
So, is voluntary VAT registration a good idea?
The answer is it depends upon your circumstances. If you get caught for a lot of VAT, becoming VAT registered will allow you to recover those costs, so it may be worthwhile. On the other hand, you run the risk of becoming pricier than your competitors or alienating clients in certain sectors, not to mention you’ll need to appoint an accountant to manage your VAT submissions.
The best thing to do if you’re unsure about voluntarily registering for VAT is to get advice from a tax accountant. They’ll be able to assess your business objectively and give you a professional opinion of whether voluntary VAT registration is the right move for you.