Should you voluntary register for VAT?
Put simply, VAT happens to be a major factor in UK business activities. To many small-scale proprietors, this might turn out to be an uphill task, but then again, weighing in the pros and cons of it would base a sound decision. In this blog, we will explain what VAT is, what voluntary VAT registration is, its pros and cons, and the overall registration process.
What is VAT?
VAT is a type of tax which is levied on most goods and services offered by VAT-registered businesses in the UK, as well as on certain goods and services imported from EU and non-EU countries. When any business gets VAT registration, it adds VAT to the sale price of its goods and services; this is to be collected on behalf of HMRC.
The other important attribute of VAT is that the business is allowed to claim a refund of VAT paid on purchases of goods and services from other businesses. A business not registered under VAT cannot recover any portion of VAT payable. Registration is, therefore, a must for those who want to charge or claim a refund on VAT for their transactions.
A business is obliged legally to be VAT-registered if its taxable turnover exceeds £90,000 in the last 12 months, or is likely to be exceeded in the next 30-day period. This figure has been revised recently from £85k to £90k.
Voluntary VAT Registration
Voluntary VAT Registration allows a business whose turnover is less than £ 85,000 threshold to get registered for the same before getting obligated by law to do so. Most small-scale businesses take this option for several benefits that come along in running business processes. Let’s take a glance at some reasons a business may decide to register voluntarily.
Benefits of Voluntary VAT Registration
- Reclaim VAT: Businesses can reclaim the VAT on most goods and services that are bought from another business. These can be considerable savings.
- Competitive Pricing: If a business customer is VAT-registered, then they themselves can reclaim the VAT charged. Therefore, a business can charge a competitive price yet recover VAT on its costs.
- Gain in Business Image: Being registered for VAT gives the impression that the company is larger and better established. As such, customers, lenders, and investors will likely be attracted since they would consider this fact-just a little bit-more trustworthy.
- A business upon its operation under VAT gets a VAT number and is accredited to place the numbers on the invoice, letterheads, and websites. This brings professionalism to the branding aspect of the business.
- Backdating Registration: If sufficient evidence is provided to HMRC, a business can backdate the VAT registration up to four years. It means being able to reclaim VAT paid on equipment and services still in use.
- Better Record Keeping: Being registered for VAT means better keeping of records, which can be constructive for the overall management of the business.
Disadvantages of Voluntary VAT Registration
Though there are apparent benefits, there are certain disadvantages of voluntary VAT registration, too. Understanding them will make the entrepreneur aware and hence make better choices.
- Increased Price: More often than not, the amount of VAT charged sends away those customers who are sensitive to price and would find it unaffordable at the end.
- VAT Bills: Unless the business only receives a fraction of the VAT that it pays to HMRC each quarter, for many types of business, there exists the possibility of incurring large VAT bills. This will likely impact cash flow.
- Administrative Burden: VAT registration increases paperwork and administration. One has to retain all VAT invoices and receipts, maintain records of VAT accurately, and file VAT returns quarterly.
How to Register for VAT
You can register for VAT, if you choose to do so; the process is relatively straightforward. You can register on the GOV.UK website. If you register online, you will then be given a VAT online account-that is, a Government Gateway account-which you use to submit VAT returns to HMRC.
Otherwise, the company can avail itself of the professional service of, for example, 1st Formations, which offers its VAT registration service for £39.99 plus VAT. For that amount, the service includes preparation and submission of your application for VAT registration, access to a VAT registration expert in case you have any questions, confirmation of your VAT registration number, and guidance on how to create an HMRC Government Gateway account.
It usually takes HMRC three weeks to process a VAT registration application. The business should, however be keeping records concerning VAT during this period, retaining all invoices and receipts. Businesses cannot charge VAT or show it on the invoice until they receive a VAT registration number. They can, however, work out a price that absorbs the input VAT they intend to charge.
Working out VAT Returns
Those registered are expected to submit VAT returns every three months online. These must be submitted to HMRC one month and seven days at the end of each VAT period. It is highly recommended that an accountant be appointed to process the VAT return in order to ensure the business stays compliant with the regulation. It could ease the administrative burden and make sure all submissions are accurate and on time.
VAT payments to HMRC are, therefore, mainly made electronically. The dates for such payments normally fall on the last dates for submission of returns on VAT. It will, therefore, be prudent for any businessperson not to attract penalties by being on the wrong side of HMRC.
Conclusion
The conclusion is that it may have various benefits, related to voluntary registration, such as claiming VAT, increasing business credibility, and better recording of documents. On the other side, its probable disadvantages are increased customer prices and more administrative work.
This is quite prudent, as one seeks professional advice from an accountant on whether to register for VAT. They could give advice relevant to a business and to the particular circumstances one may find themselves in. Whether one decides to get registered voluntarily or waits till they have passed the legal threshold, at least informed, one will know what’s the best thing for their business.
If you have any questions or if you’d like to share your experience regarding VAT registration, then please contact FAAS Accountants. We are here to help and would appreciate hearing about it!
FAQs (Frequently Asked Questions)
Businesses may voluntarily register for VAT (Value Added Tax) even if their turnover is below the VAT threshold (£90,000 as of 2024) for several reasons. Voluntary registration allows businesses to reclaim VAT on purchases, enhances the business’s credibility, and ensures compliance if the business expects to exceed the threshold in the near future. It can also simplify dealings with VAT-registered customers and suppliers.
Yes, you can register for VAT with no turnover. This is often done by businesses that have not yet made any sales but anticipate doing so in the future. By registering, they can reclaim VAT on start-up costs and other purchases made before generating revenue.
Yes, you can voluntarily deregister for VAT if your business’s taxable turnover falls below the deregistration threshold (£88,000 as of 2024) or if you cease trading. Voluntary deregistration can reduce administrative burdens and avoid the need to charge VAT on sales. However, you may need to account for VAT on any stock or assets you have at the time of deregistration.
Yes, voluntary organisations, such as charities, are generally subject to VAT in the UK. However, they may benefit from certain VAT reliefs or exemptions depending on the nature of their activities. For instance, some goods and services purchased by charities may be zero-rated or exempt from VAT. Charities may also voluntarily register for VAT to reclaim VAT on purchases.