The pros and cons of voluntary VAT registration

As we discussed in our previous article, VAT is a tax that businesses charge to their customer on the goods and services they sell. If your business has an annual turnover that is below the VAT threshold, currently £85,000, you are not required to register for VAT, but you may choose to voluntarily register.  You can do this even if you are under the threshold.

A word of warning, though, the £85,000 threshold is a rolling twelve-month period, not a figure for your tax year or calendar year.  It doesn’t reset to zero is a year ends. 

There are both advantages and disadvantages to voluntarily registering for VAT when you are under the VAT threshold.  Here are some that may be worth considering before making any decision.

Advantages of voluntarily registering for VAT 

Increased business credibility 

Voluntarily registering for VAT can make your business appear more established and credible to other businesses, especially if you plan on doing business with larger companies. Being registered for VAT can also give your business a more professional image, which can help attract more customers and improve your reputation.

Ability to reclaim VAT 

Once registered, you can claim back any VAT paid on business purchases. This can help reduce business costs and increase profits. For example, if you buy goods or services from another business that is also registered for VAT, you will be charged VAT on the purchase. By being VAT-registered, you can reclaim this VAT as input tax, which can be offset against any VAT you charge on your sales. This can reduce the overall VAT liability of your business. 

Attract larger customers 

Some larger companies only do business with VAT-registered businesses, so voluntarily registering can help you access more lucrative contracts. If your business is involved in international trade, being VAT-registered can also help you comply with VAT regulations in other countries.  Historically, local authorities tended to fall into this category. 

Some insurance companies choose to deal only with VAT registered businesses, as will some warranties - especially in the motor trade.

Disadvantages of voluntarily registering for VAT 

Additional accounting work 

When you are VAT registered, you will need to keep detailed records of all sales and purchases and submit a VAT return every quarter. This can be time-consuming and increase administrative costs. You will also need to ensure that your accounting system is set up correctly to handle VAT. If you make mistakes on your VAT return, this can result in fines and penalties from HMRC.

Cash flow issues 

When you are VAT registered, you will have to charge VAT on your goods and services, which may make them more expensive to customers. This may result in slower payments and cash flow problems for the business. You will also need to pay any VAT due to HMRC, which can be a significant cost for some businesses.

Complexity 

The rules around VAT can be complex and confusing, especially for small businesses. Failing to comply with VAT regulations can result in fines and penalties from HMRC. You will also need to keep up to date with any changes to VAT rules, which can be difficult and time-consuming. 

Voluntarily registering for VAT when your business is under the VAT threshold can offer benefits such as increased credibility, access to VAT refunds, and the ability to attract larger customers. However, it is not something to be entered into lightly.  It involves additional accounting work, can lead to cash flow issues and requires compliance with complex VAT regulations.

Ultimately, the decision to register for VAT should be based on careful consideration of your business's specific circumstances and the potential costs and benefits involved. Seeking professional advice can help you make an informed decision and avoid any potential pitfalls.

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.