Learn more about voluntary VAT registration and how it could be beneficial to your business and its finances.
Voluntary VAT registration is a process that’s not widely known and often met with confused faces. After all, why would you volunteer to pay VAT?
The simple answer is that there are circumstances where it is more beneficial for a business to undertake VAT voluntary registration than not to. Read on for the pros and cons to find out whether your business finances could benefit.
If you would like to discuss your individual circumstances and see how we can help with VAT registration and VAT returns please contact us for a free consultation.
A VAT refresher
Value-added tax (VAT) is the tax added to products and services and is administered by HMRC. Businesses registered for VAT must charge it to customers on vatable goods and services sold known as output tax.
Most goods and services are charged at the standard rate of 20%, while others might be at a 5% reduced rate, 0% rate or exempt entirely.
Businesses registered for VAT can also reclaim VAT on vatable goods and services they purchase themselves, known as input tax.
If, for a given period, your output tax is greater than your input tax you will need to pay HMRC the difference. If however, your output tax is less than your input tax you will be able to claim back the difference from HMRC.
When do you have to register for VAT?
Your business must register for VAT if your taxable turnover is expected to exceed the threshold of £85,000 within the next 30 days – or if your business has had a VAT taxable turnover of more than £85,000 over the last 12 months.
Taxable turnover is the total amount of everything sold that is not VAT exempt. It doesn’t matter if you are a sole trader or limited company, the same rules apply.
Voluntary VAT registration
While meeting these thresholds means you must register your business for VAT, you can also register voluntarily at any time, no matter how small your business. Here are some of the pros and cons of VAT voluntary registration to help you decide if it’s right for your business.
Pros of voluntary VAT registration
- VAT can be reclaimed on vatable goods and services purchased. If you tend to sell zero-rated products while buying standard rate products this can be an appealing option as you may receive money back from HMRC.
- Small business can give the appearance of being bigger and more established when VAT registered, which can be appealing to stakeholders.
- When VAT registered, you will receive a VAT number which can, and should, be displayed on all business correspondence. This can give your business more credibility, which can help when dealing with other businesses.
- By registering voluntarily, you’re sure to avoid a penalty for failing to register. This is of particular interest for growing businesses or those which sit close to the threshold.
- Voluntarily VAT registration allows you to reclaim VAT your business incurred in the last four years, provided the goods and services are still wholly used in the business and all receipts and paperwork have been kept.
Cons of voluntary VAT registration
- If your customers are not VAT registered than it can increase the total price of your good and services to them, making your offering less appealing.
- You could end up with a large VAT bill if you generate more VAT from sales than from purchases.
- Being VAT registered requires extra admin and responsibilities with processing, maintaining records and filing VAT returns. This is where a bookkeeper can help.
- You must be more aware of your cashflow status, particularly as you are likely to have a VAT payment due to HMRC every quarter.
- Once you have registered, you must ensure you abide by the VAT rules on charging and claiming VAT and also keep all additional financial records such as VAT receipts.
While it is a big decision whether or not to voluntarily register for VAT, a bookkeeper or accountant can help you through the process. This will put you in the best possible position to ensure all VAT admin and returns are completed efficiently and on time, letting you reap the benefits of being VAT registered while being able to focus on running your business.
Lava Sky Accounting offers VAT services including VAT registration and VAT returns using MTD compliant software. Get in touch today to see how we can help you and your business.