There are over 4 million businesses in the UK and well over two thirds of them aren’t registered for VAT. In fact, many businesses go out of their way to avoid registering for VAT – so much so that the Tax Simplification Committee has recommended severely reducing the limit at which businesses must register to bring an extra £2bn-or-so more in tax.
Is there a case for voluntary registration though? In other words, registering for VAT when you don’t actually have to? There may be and it all depends on individual circumstances and that’s what TWP Accounting is exploring in this article.
Registering for VAT
You must register for VAT once your turnover passes £85,000 or at the point during the year when it seems that your turnover to date suggests you’ll breach that threshold.
Once you’ve registered, you must, by law, charge 20% on top of your goods and services to the end users. There are some products which are rated at 5% VAT and others which don’t carry VAT. In most cases however, it’s fair to say that you will have to charge 20% VAT on (almost everything).
When you sell something, you collect and store the 20% VAT you charge customers – this is your output VAT. For every VAT invoice a supplier sends you over time, the VAT you pay is your input VAT. At the end of the VAT period, you add up all your input VAT, subtract the total input VAT you’ve paid and then you either pay HMRC the difference or they pay you it.
If you sell to VAT-registered businesses, it doesn’t really matter to them if you charge VAT or not as they’ll be able to claim it back.
However, if you sell to consumers, they will not be able to claim VAT back and all they’ll really see is that you’ve put your prices up by 20%.
So, in addition to the extra paperwork that being VAT registered involves, there are serious business considerations to think about too. So, what are the pros and cons?
Advantages of registering for VAT
Your business may have been hovering around the threshold for years and you could be pushed over the threshold by a sudden rush of sales. Registering for VAT takes a few weeks and the business of invoicing during the registration period can get messy from an accountancy point of view. By registering for VAT before you actually have to, your business could trade without having to navigate this complicated and time-consuming administrative hurdle.
Having a VAT number on your stationery, your website, your invoices and quotes, and your vehicles also makes you look bigger and more successful. It may mean the difference between being invited to supply a quote for work and being passed over on the job. In addition, many companies and organisations often have an unwritten policy not to deal with non-VAT-registered businesses.
Disadvantages of registering for VAT
As we mentioned earlier, registering for VAT could put you at a price disadvantage over non-VAT-registered competitors because you have to add 20% to everything you sell. There is more paperwork and administration involved too and this is only going to get more complicated following the introduction of Making Tax Digital from 2019.
You will also have to make VAT payments to HMRC once a quarter/month/year if your input VAT is lower than your output VAT. This will need to be factored into your cashflow forecasting.
Get the latest advice and guidance on VAT from TWP Accounting
Contact your TWP partner on 01932 704 700 or email us at firstname.lastname@example.org to discuss VAT registration and whether it’s right for your business if you’re turning over less than £85,000 a year.