Businesses selling goods and services which are subject to VAT must register for VAT when their turnover reaches the registration threshold. But for some businesses, registering for VAT before the threshold on a voluntary basis can have benefits. In this article we explain who should register for VAT, as well as the benefits and disadvantages of registering early voluntarily.
Who can register for VAT?
You can register for VAT if you are in business as:
a sole trader
a limited company
One of the (false!) myths of VAT is that only limited companies can register. The basis for VAT registration is actually the turnover of the business (the amount it makes from sales) rather than its legal structure. So, whatever type of business you run, you can register for VAT if you want or need to.
A quick note on VAT terminology
For VAT, 12 months doesn’t mean a fixed calendar year or tax year. It’s a rolling 12 month period, and you’re always looking back at the previous 12 months from this point in time.
VAT taxable means anything that isn’t exempt from VAT. It is a product or service which is subject to tax. It also includes things which are zero rated for VAT (which is different to being VAT exempt!).
Turnover is the total amount of sales, before any expenses or other deductions are made.
Our video explains VAT for beginners, if you’re just starting out.
When do I need to register for VAT?
Putting aside voluntary registration for now, it’s essential that you register once your VAT taxable turnover reaches the threshold. To check, look at your VAT taxable turnover for the last 12 months. This is the total amount of your sales for things which are subject to VAT.
If the VAT-taxable turnover for goods and services exceeds the threshold (which in 2020/21 is £85,000), you need to register for VAT immediately.
Will my business benefit from voluntary VAT registration?
Like any business decision, making a voluntary VAT registration has its pros and its cons. The significance of each one depends on you and your business. The benchmark for most businesses considering voluntary VAT registration is tax efficiency, in the form of VAT refunds.
A business which regularly pays more VAT to suppliers than it would collect from customers if it registered, could benefit from voluntary VAT registration.
This is because businesses can claim back the VAT they pay on purchases, if the amount they pay is higher than the amount the collect on their sales. We’ll explain this in more detail, including HMRC’s terminology.
The VAT which a business pays on its purchases (known as input tax)
Businesses can pay VAT on purchases all the time, even if they don’t register for VAT. Usually this is because their suppliers are VAT registered, and so charge VAT on their sales.
If the total amount of VAT it pays on its purchases is more than the amount of VAT that it collects from customers on its sales:
The business has paid out more VAT than it has collected and will be able to reclaim the difference from HMRC.
The amount it can reclaim will be the total amount paid, minus the total amount collected.
The VAT which a business has to charge on its sales if it registers for VAT (known as output tax)
The key here is that businesses only charge VAT on their sales if they register for VAT. After registration, the business essentially collects the VAT from its customers on behalf of HMRC. The business pays this on to HMRC in the form of a VAT bill.
If the total amount of VAT it pays on its purchases is less than the amount of VAT that it collects from customers on its sales:
The business has collected more VAT than it has paid out, and will need to pay the difference to HMRC.
It will pay the total amount collected, minus the total amount of VAT paid on purchases.
Is it worth registering for VAT before the threshold?
Consider what it is that your business sells, and the things that it needs to pay for. If you regularly pay out more VAT than you would collect as a VAT registered business, it might be useful for you to make a voluntary registration. This is because you would be able to reclaim the difference from HMRC.
If you did register for VAT voluntarily, and your sales mean you regularly collect more VAT than the amount that you pay out, it might be better for you to wait until you have to register. This is because registering would mean that you have to pay the difference to HMRC.
Top tip: VAT can be a complex area, so look at how voluntary registration would affect your business on a long-term basis, rather than for what seems like a quick win.
Other benefits of voluntary VAT registration
Some businesses decide that registering for VAT early is suitable for them because of other reasons.
Making sure you register in plenty of time
There’s a lot to remember when you run a business, and it can be difficult to keep track of everything, especially when you’re busy. If you realistically expect to reach the compulsory threshold, registering for VAT voluntarily ensures you don’t miss your deadline. Nobody wants to receive penalties!
Not being VAT registered does make it obvious that turnover is below the registration threshold. For some customers VAT registration is a sign of prosperity, and therefore stability.
It might even attract buyers who are keen to offset VAT bill against their purchases. As a smaller business, voluntary VAT registration can boost your profile when competing against larger contenders.
You can reclaim VAT up to 4 years after you purchase goods.
For services, you can reclaim VAT up to 6 months after the purchase.
What are the disadvantages of voluntary VAT registration?
Voluntary registration for VAT may be a good idea, but it can also have disadvantages.
Once you register, you’ll need to either add VAT to your prices, or include it (which eats into the amount of profit that you make).
Adding VAT to your prices might discourage customers who aren’t VAT registered. They won’t be able to reclaim the VAT on the purchase, so might seek out a competitor who doesn’t charge it.
VAT is incredibly complex! There are different VAT schemes available which aim to simplify the process, but you might still need help.
HMRC don’t distinguish between compulsory and voluntary registration. Once you register for VAT, you must meet all of the requirements, including record keeping, submitting a VAT return, and paying your bill.
Compliance is essential, so you might find the extra work isn’t worth it. That said, bookkeeping software (like our very own Pandle!) can considerably ease the burden.