Businesses selling taxable goods and services must register for VAT when their turnover reaches the VAT threshold, but registering voluntarily before reaching the threshold can have benefits for some businesses. In this article we’ll look at compulsory VAT registration versus voluntary registration, and what the rules and requirements are.

Putting aside voluntary registration for now, it’s essential that you register for VAT if your total VAT taxable turnover:

• Reaches the registration threshold (£90,000 from 1st April 2024)
• You expect to reach the limit within the next 30 days

How do I check my VAT taxable turnover?

Your VAT taxable turnover is the total amount of sales made in the last 12 months which would have been subject to VAT. This is where good bookkeeping steps in to save the day, so you know where you’re up to! A few important points to remember:

• For the purposes of VAT registration, 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 leading up to this point in time.
• VAT taxable means any product or service which is subject to VAT. 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.

You can register for VAT if you are in business as a:

• Sole trader
• Partnership
• Limited Liability Partnership
• Club
• Association
• Limited company

One of the (false!) myths of VAT is that only limited companies can register. This isn’t true, and the basis for VAT registration is actually the turnover of a 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.

Like any business decision, this depends on your own unique circumstances. Some businesses find that making a voluntary registration is worthwhile because it helps them to be more tax efficient.

This is because VAT is charged by the seller, so you’ll pay VAT even if you’re not registered for it yourself. If you buy something taxable from a VAT-registered seller, then they’re going to charge you VAT on the purchase.

• Input tax: The VAT which a business pays on purchases whether or not it’s VAT registered
• Output tax: The VAT which a business must charge on taxable sales but only if it registers for VAT

If a business is VAT registered it can also claim back the VAT it pays on purchases – as long as the amount it pays out is higher than the amount it collects on sales in the same period of time.

Will registering for VAT be tax efficient?

The question of voluntary VAT registration being tax efficient depends on the things that your business buys and sells. Not everything is subject to VAT, and some items are charged at different rates. For instance, children’s shoes are subject to VAT but at a rate of 0%, whereas parking is exempt.

So, if your business buys lots of things that are subject to VAT, but the things it supplies are not, you’ll regularly pay more VAT on purchases than you charge on sales. This means that making a voluntary registration for VAT would allow you to claim back the difference between the two on a regular basis, which will help you be more tax efficient!
 

 
Think about it from the other side though. If the nature of your sales changes so you end up charging VAT more regularly, making a voluntary registration for VAT might not be so useful. In that situation, it would likely be better for you to wait until you have to register.

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!

Attracting customers

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. As a smaller business, voluntary VAT registration can boost your profile when competing against larger contenders.

You might also find that some VAT-registered customers prefer to shop with other VAT registered businesses, so think about who your customers are, and what your registration might mean to them.

Reclaiming VAT on purchases before registration

Once you register for VAT, you may be able to reclaim the VAT on purchases you made before registering.

• 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

If you know you need to register for VAT in the near future, but don’t want the window of opportunity to close on reclaiming VAT for older purchases, you might feel that making a voluntary registration is useful.

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 in the current price (eating into the amount of profit that you make. Either way, VAT registration could have an impact on your pricing.
• 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.

To talk to one of the team about our online accounting services (including VAT), call us on 020 3355 4047, and get an instant online quote.