Advantages and disadvantages of voluntary VAT registration
In this article, we explore voluntary VAT registration and the associated advantages and disadvantages. For instance, becoming VAT registered can offer numerous benefits to businesses of all sizes; however, it also entails a substantial amount of administrative work.
If you are considering voluntary VAT registration, it is crucial to understand the various pros and cons and how they might impact your business, which we will explain.
What is VAT?
Value Added Tax (VAT) is charged on most goods and services supplied by businesses registered for VAT in the UK. It also applies to certain goods and services imported into the UK from both EU and non-EU countries.
VAT-registered businesses include VAT in the selling price of goods and services sold to both commercial and non-commercial customers. These businesses can usually reclaim the VAT paid on the goods and services they purchase.
Businesses that are not registered for VAT cannot reclaim the VAT they pay. VAT registration is necessary to charge or reclaim this tax on purchases and sales.
A business must legally register for VAT if its taxable turnover (total income, not profit) in the previous 12 months exceeds the VAT registration threshold of £90,000 (for the 2024/25 tax year) or is expected to exceed this threshold in the next 30 days.
What is voluntary registration?
Many small businesses with a turnover below the VAT registration threshold opt to voluntarily register for VAT before it becomes a legal requirement. They make this choice for various business reasons, which we will explore below.
The advantages of voluntary VAT registration
- You can reclaim VAT on most goods or services purchased from other businesses.
- If your customers are VAT registered businesses, they can reclaim the VAT from HMRC. This allows you to maintain competitive prices and recover VAT on your expenses.
- Small businesses can appear larger and more established, which can attract customers, lenders, investors, and suppliers who assume the turnover exceeds the VAT registration threshold.
- VAT-registered businesses can display their VAT number on invoices, letterheads, websites, and other business materials. This practice increases their appeal to companies that prefer dealing with VAT-registered entities, as it demonstrates legitimacy and compliance with tax regulations.
- Voluntary VAT registration can be backdated up to four years with sufficient evidence provided to HMRC, enabling businesses to reclaim VAT paid on equipment still in use.
- Registering for VAT requires businesses to maintain more accurate and detailed records, leading to better financial oversight. This, in turn, supports improved overall business management, as companies gain deeper insights into their expenses, revenue, and tax obligations.
The disadvantages of voluntary VAT registration
While VAT registration offers several benefits, there are also some drawbacks to consider:
- VAT could make goods and services less appealing to non-VAT registered customers, particularly if they see the final cost as unreasonable or overpriced.
- Businesses may face a significant VAT liability from HMRC if they collect more VAT on sales than they can reclaim on purchases from other businesses.
- VAT registration necessitates maintaining more accurate records, which ultimately benefits the overall management of your business.
How to register for VAT
If you choose to register your company for VAT, you can complete the application online at GOV.UK. This process not only registers you for VAT but also establishes a VAT online account, also known as a Government Gateway account. This account is necessary for submitting your VAT returns to HMRC.
Alternatively, Startxpress offers a cost-effective VAT Registration Service. The service includes:
- Preparation and submission of your UK VAT registration application to HMRC.
- Access to a VAT registration expert for answering your questions.
- Confirmation of your VAT registration number.
- Instructions on creating your HMRC Government Gateway account to activate your VAT registration online.
Registering for VAT online typically takes about 3 weeks. During this period, it is advisable to begin maintaining records, accounting for VAT, and retaining all pertinent invoices and receipts. However, you cannot start charging VAT or showing it on invoices until HMRC issues you a VAT registration number.
Meanwhile, you can adjust your prices to include the expected amount of VAT. Once you have received your VAT number, you can then issue VAT invoices to customers. This preparation ensures a smoother transition when you officially start charging VAT.
VAT Returns
Startxpress can help you to prepare and submit VAT returns and manage VAT matters can be advantageous.
VAT Returns are typically filed online for each 3-month VAT period. These returns must reach HMRC within 1 month and 7 days after the end of the VAT period.
You need to make VAT payments electronically to HMRC, with the payment deadline usually aligning with the VAT Return filing deadline.
In summary, voluntary VAT registration offers clear benefits like boosting business credibility and allowing VAT recovery on purchases. Additionally, it can improve cash flow management. However, it also brings more administrative work and can make pricing less appealing to non-VAT registered customers. Therefore, businesses need to carefully assess whether VAT registration supports their long-term goals. For better clarity, seeking professional advice ensures compliance and informed decision-making. By weighing these factors, businesses can make choices aligned with their growth strategy.
For further insights, explore the Startxpress Help Center and Blog. If you have questions or need support, reach out anytime at support@startxpress.io!
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