Updated on May 14, 2022
Legalities such as VAT registration are inevitable when you establish a new business, so be prepared for them. When your taxable turnover (not profit) for the previous year surpasses £85,000, you must legally register for VAT (or is expected to do so within the following 30 days).
It’s possible that some small businesses, despite having taxable sales below £85,000, will elect to voluntarily register for VAT. Before we get into the benefits and drawbacks of VAT registration, let’s have a look at what VAT is.
VAT, or “value-added tax,” is a consumption tax imposed on goods at each level of the production chain whenever value is added. The vast majority of goods and services offered by VAT-registered firms in the United Kingdom are subject to a VAT levy. Some goods and services imported from EU and non-EU countries are also subject to VAT.
Customers who purchase these goods and services from VAT-registered enterprises will see a VAT charge added to the sale price. However, firms that have been registered for VAT can usually recoup the VAT they have paid when purchasing goods or services from other businesses.
And because everything has two sides, let’s examine the advantages and disadvantages of VAT registration from both sides of the coin (voluntarily).
The Pros of Being VAT Registered
The benefits and drawbacks of VAT registration are moot because the £85,000 level is a legal requirement. However, there are a number of benefits for businesses seeking voluntary VAT registration (although these also apply to businesses required by law to register for VAT):
VAT can be applied to the sale of nearly any product or service.
Most products and services acquired from other companies can be reclaimed for VAT.
In terms of marketing, it’s fantastic – businesses who are VAT-registered appear more respectable and trustworthy. This will not only appeal to their customers, but also to their clients, investors, suppliers, and others who may presume the company is turning over more than £85,000 because of VAT registration.
Because many businesses avoid working with non-VAT-registered businesses, VAT-registered businesses are given a unique VAT number that can be displayed on company letterheads, invoices, and stationery as a sign of their legitimacy/VAT registration.
Voluntary VAT registration allows businesses to recoup VAT paid on equipment purchased as far back as four years in the past. However, HMRC must be presented with appropriate evidence.
The Cons of Being VAT Registered
These seemingly disadvantageous aspects of VAT registration aren’t an issue if your firm does not make more than £85,000 in annual revenue. Since the following disadvantages exceed the advantages, you should reject the option of voluntary VAT registration:
As a result, any products or services you sell with VAT may be overly pricey or excessively overpriced for certain of your clients and consumers who aren’t registered for VAT.
If your firm generates more VAT from selling goods and services than it pays in VAT on goods and services purchased from other companies, HMRC has the ability to levy a heavy fine on your company.
VAT-registered businesses are required to keep meticulous records of all VAT invoices and transactions, as well as to file quarterly VAT returns. For VAT-registered businesses, this documentation is unavoidable.
How to Become VAT Registered
You must log into HMRC Online Services in order to apply for VAT registration – it’s a simple process that takes about two weeks for HMRC to process the application.
Importantly, until you acquire your HMRC number, you are not allowed to charge VAT or display any such charges on invoices. It’s also possible to alter your prices to reflect the new VAT rate.
In most cases, VAT returns are filed online every three months. After the conclusion of the VAT period, they must be sent to HMRC within one month and seven days. HMRC only accepts electronic VAT payments.
The payment date for VAT is usually the same as the deadline for submitting your VAT Return.
VAT registration isn’t necessarily a bad thing; it signifies that you have a lot of money coming in and that you’ve done well financially.
In the end, if you decide that voluntarily registering for VAT isn’t necessary for your small business, you can continue operating as you have in the past. As long as you are not VAT-registered, you cannot charge or claim VAT on any of your sales or purchases.
As soon as you’ve completed the registration process for VAT, you should begin keeping detailed financial records, including copies of any essential invoices and receipts. Consider employing a professional accountant if you aren’t confident or don’t have the time to finish the VAT registration process and all following VAT concerns.
To learn more about the benefits and drawbacks of VAT registration, speak with a member of our knowledgeable and experienced business formations team. They will guide you through the process from start to finish.