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Should I register my business for VAT?

Should a business voluntarily register for Value Added Tax (VAT)? Unfortunately, there is no definitive answer. Whether it is beneficial for your business will depend on a variety of factors.  This could be the service or product you are providing and if your suppliers or customers are VAT-registered. Also, as we know, circumstances can change over time, which makes it wise to revisit this topic on a regular basis.

Compulsory VAT Registration

First of all, a reminder of when a business must register for VAT:

  • where taxable turnover exceeds the VAT threshold (currently £85,000)
  • where taxable turnover is expected to exceed £85,000 within the next 30 days.

Please note that these thresholds need to be checked on a rolling 30 day and 12 month period basis. Once taxable turnover exceeds £85,000, the business must register for VAT within 30 days from the end of the month the threshold is breached.

Voluntary Registration

A business with a taxable turnover less than the VAT threshold can still register voluntarily, assuming the business makes some taxable supplies. Where a business only makes exempt supplies, it cannot register for VAT.

There are pros and cons of voluntary registration, some of which we have listed here:

Advantages of VAT-registration

  • VAT can be reclaimed on most goods and services received from other VAT-registered businesses
  • your VAT-registered customers will be able to reclaim the output VAT you charge from HM Revenue & Customs (HMRC). Your costs to them will effectively remain unchanged and you can recover any input VAT on your expenses
  • if you make zero-rated supplies, such as selling young children’s clothing, output VAT is applied at a rate of 0%. This means your goods will not be any more expensive for customers but you
    will be entitled to reclaim input VAT on business expenses
  • customers may have a perception that VAT-registered businesses are more successful and reliable, which could improve the business’s sales
  • charging VAT on goods and services should increase cash inflow. Since the output VAT does not need to be paid to HMRC for, in some cases, up to four months after the supply, this cash will be temporarily available as working capital
  • when you register your business for VAT, you may be able to claim input VAT on certain goods purchased 4 years prior and services provided 6 months prior to registration.

Disadvantages of VAT registration

  • a larger administrative burden which may lead to associated costs. VAT-registered businesses must account for VAT and display specific information on invoices. Quarterly VAT returns must be submitted digitally using Making Tax Digital (MTD) compatible software
  • if your suppliers are not VAT-registered, you will have no input VAT to reclaim
  • once registered, your business could face penalties by HMRC for the late or incorrect submission of VAT returns.  This applies even if you registered voluntarily
  • non VAT-registered customers might decide to move to competitors who are able to offer lower prices because they are not VAT-registered
  • complex rules around some aspects of VAT may require the assistance of a professional adviser, which will be an additional cost to the business.

As discussed, there are both advantages and disadvantages to registering for VAT voluntarily. These will be specific to your business and individual circumstances. If you make most of your supplies to VAT-registered customers, output VAT may have little or no impact on your sales but registration would allow the business to reclaim any input VAT incurred.

Some businesses may decide against registering for VAT due to the extra compliance and reporting requirements mentioned above. However, from April 2024 the use of compatible software and quarterly reporting under Making Tax Digital for Income Tax Self-Assessment will become compulsory for many businesses and taxpayers, regardless of their VAT status. This will affect many businesses with a taxable turnover below the VAT threshold and therefore the extra costs mentioned above is only a short-term consideration. In fact, putting an appropriate software package in place to submit quarterly VAT returns now means you will be MTD ready well in advance of April 2024.

At GWA, we have a dedicated team who can help you choose the best accounting software for your business and provide you with ongoing training and support.

If you want to discuss if voluntary VAT-registration would specifically benefit you and your business, please get in touch and we will be happy to help.

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