Why would a company choose voluntary VAT registration? It can be a tricky question. There are many potential benefits, with a few potential downsides to consider. Either way, it’s a decision that should not be taken lightly.
Over 50 per cent of VAT-registered businesses trade below the compulsory VAT threshold. In this blog, we’ll explore why voluntary registration might be beneficial.
What is VAT?
Value Added Tax (VAT) is a tax charged on goods and services sold in the UK. It’s an indirect tax, meaning that VAT-registered companies must collect it on sales and then pay it to the government. Several VAT rates apply to different types of goods:
- Standard rate 20 per cent
- Reduced rate 5 per cent
- Zero rate 0 per cent
Most goods are subject to standard rate VAT with certain exceptions. Books and newspapers, for example, are zero-rated, so do not include VAT. Reduced rate items tend to be sanitary goods, children’s items, and energy-saving products. Other goods, like stamps, are completely VAT exempt.
VAT charged by businesses is added to the cost of their goods and is known as output VAT, or output tax. Likewise, VAT paid by the company on purchases is known as input VAT, or input tax.
At regular intervals, your VAT registered company must deduct the input tax paid from the output tax charged and pay your VAT bill to HMRC. You can’t reclaim input tax paid on everything such as entertainment so it’s essential to categorise your purchases correctly.
There is a compulsory VAT registration threshold. A company’s taxable turnover dictates if it must register or not.
Who needs to register for VAT?
According to current VAT rules, UK companies must register for VAT once their turnover reaches £85,000 in any rolling 12-month period. This is known as the VAT threshold. Companies approaching the VAT threshold usually monitor their annual turnover at the end of every 30-day period. This way, they’ll know if their last 12 months’ turnover exceeded £85,000.
When this happens, the company must legally register to start collecting VAT. The date you register is known as the effective date of registration’, and you’ll charge VAT on any taxable turnover from this date. If this process seems daunting, you might ask yourself do I need an accountant?
What is voluntary registration?
Voluntary registration is an option for any business under the VAT threshold. The name says it all: companies may choose to charge VAT, even when trading below the compulsory VAT level. There are various reasons they might do this. These should be weighed against downsides, as voluntary VAT registration brings additional duties.
Why register for VAT voluntarily?
Whether to voluntarily register for VAT can be a complex decision. There are many potential benefits, with some added responsibilities and possible downsides. First, let’s look at the potential benefits.
Voluntary VAT registration benefits
The benefits of voluntary VAT registration include profitability, reputation and structure.
Backdated VAT
If you’ve kept receipts, you can backdate VAT payments made up to four years ago. Specifically, HMRC currently allows you to claim:
- VAT paid on services in the six months before registering
- VAT paid on goods that your company still has or that were used to make others in the past four years.
It can be tricky to decide precisely which payments apply, so many people choose to work with an accountant when backdating VAT. In many cases, claiming back old VAT payments might result in significant cash sums. At this stage, the cost of an accountant may well be worth it they could help reclaim as much backdated VAT as possible.
Reclaim input VAT
VAT-registered companies can deduct input tax from their VAT bill. This can make voluntary registration a good idea for companies that pay significant amounts of VAT on business purchases.
Work with VAT-registered companies
Being VAT-registered might encourage bigger companies to work with you. One reason is that paying VAT to you will lower their VAT bill, potentially making your costs more competitive.
Increased credibility
Voluntary registration might make your company look more established. You’ll get a VAT number to put on official documentation, and some businesses might prefer to work with VAT-registered companies for their increased credibility.
Registering for VAT can also give the impression that your business turnover is above the threshold something that may be appealing to some small business owners.
Record-keeping
Being VAT registered brings several additional responsibilities. One of those is the requirement to keep excellent financial records. Should you voluntarily register, you’ll have an extra incentive to properly record transactions, keep receipts, and file everything. This can mean a more efficient business in the long run.
While there are plenty of benefits from voluntary registration, there are also potential downsides.
The disadvantages of voluntary VAT registration
The disadvantages of voluntary VAT registration include more responsibilities and larger fees.
Increased responsibility
VAT registration brings additional tasks. You’ll need to charge VAT on sales, track your purchases accurately, keep precise records and file returns. You’ll also have to be organised enough not to miss a VAT return deadline. If you are already short on time, these added responsibilities might be too much to take on without help.
Higher fees
Once you’ve registered for VAT, the prices you charge will naturally increase. This might not be too much trouble if you work with other VAT-registered businesses, but it can make your rates uncompetitive when selling to non-registered clients. You should consider your client base before voluntarily registering.
Little input tax
Another factor is how much VAT your company pays on purchases. If it’s a significant amount, voluntary registration could be a good idea. However, charging VAT when you don’t pay much can potentially leave you with a cash flow hit. Forecast the input tax you’ll pay on goods and services to see if you’d expect a large VAT bill.
Electronic requirements
HMRC increasingly manages VAT through the electronic Making Tax Digital service. While this can make things more straightforward, it might be difficult if you don’t already use electronic accounts or accounting software. In this case, voluntary registration might mean an additional task in migrating to electronic accounting even if this might be beneficial in the long term.
How to register for VAT
If you’ve decided that voluntary registration is suitable for your company, there are a few steps to take.
- Make sure you’ve gathered all your company information and the last four years of purchases
- Create a VAT online account on the Government Gateway
- Prepare for managing and charging VAT before HMRC confirm your VAT number
- Once you’ve received your number, publish it in documents and begin charging VAT.
You’ll have to manage all VAT transactions carefully to ensure your returns are accurate. It’s crucial to get your VAT registration and returns correct, so consider speaking to a professional accountant offering VAT services if you’re unsure.
Should I voluntarily register for VAT?
Businesses can voluntarily register for VAT. It’s a good idea in some situations, such as to backdate large amounts of VAT or to add credibility. In others, it might just bring additional work or costs. Each company is unique if you have any doubts on whether to voluntarily register or not, speak to a professional accountant for advice.
