Some businesses are legally required to register for VAT, but for others it is entirely optional. Whilst choosing to pay more tax may seem counter-intuitive, registering for VAT can be incredibly beneficial to many small businesses. Of course, there are also a few drawbacks, but these are typically overshadowed by the notable advantages you can gain.
Below, Quality Company Formations highlight the main pros and cons of registering for VAT, providing you with a basic overview of what you need to consider. These apply to all types of businesses to varying degrees, whether registration is mandatory or voluntary.
Benefits of VAT registration
Value Added Tax (VAT) is a consumption tax that is added to the majority of goods and services sold by VAT-registered businesses. Essentially, it is a tax that businesses collect on behalf of HMRC.
Registration is compulsory if your VAT-taxable turnover in the past 12 months exceeds £85,000, or if you expect your turnover to exceed this amount in the next 30 days.
However, if your turnover is below this threshold, voluntary VAT registration is available, enabling your small business to access the same benefits as larger competitors. These include:
1. Reclaiming VAT
You can reclaim the VAT you pay on goods or services that you buy from other businesses. For example, stock and supplies, equipment and machinery, utility bills, broadband and phone, couriers, accountancy fees, and even registered office or business address services.
This is not possible unless you are VAT-registered, yet you still must pay VAT on business purchases either way.
You are also able to backdate VAT claims for up to 4 years for business goods that you are currently using, and up to 6 months for services. This means that you reclaim the VAT you paid on any goods or services purchased prior to registration.
2. Charging VAT
You can apply VAT to the sale price of many, if not all, of the products or services you sell. This will improve your business cash flow. Additionally, if you pay more VAT on purchases than you receive on sales, you can claim the difference back from HMRC. Something to think about if you are required to buy expensive equipment and machinery.
3. Business image
Upon registering for VAT, you will receive a VAT registration number. Displaying this number will give you more credibility and strengthen your business image. You will be seen as more professional and trustworthy.
Registration will also create the impression that your business is established and bigger than it is. This kind of boost can be incredibly valuable for new firms and small businesses, especially when operating in a competitive market.
4. Attract new clients
It is not uncommon for larger, VAT-registered firms to work exclusively with other VAT-registered limited companies. Regardless of whether your business is set up as a company, partnership, or sole trader, you may be viewed as too small or inexperienced if you’re not registered for VAT.
Therefore, depending on the industry in which you operate, registering for VAT may broaden your appeal to a wider range of clients and suppliers, allowing you to compete on a level playing field and bid on valuable contracts that you may not otherwise have access to.
Disadvantages of VAT registration
With any type of tax, you’re going to have to deal with additional bookkeeping, as well as reporting and filing requirements for HMRC. Unfortunately, these tasks are simply part and parcel of running a business.
As a VAT-registered business, the notable drawbacks include:
1. Rules and administration
Getting to grips with VAT rules and requirements can be a little tricky if you don’t have any prior experience. You will need to familiarise yourself with these, keep meticulous VAT records, and complete a VAT Return for HMRC at the end of every 3-month accounting period.
You will also have to pay your VAT bill every 3 months, so you must keep a very close eye on the amount of VAT you collect from customers and the amount of VAT you pay on purchases.
As a VAT-registered business, you must include the correct rate of VAT in the price of every product or service you sell, other than those which are exempt. If you are already running your business prior to registration, you will need to change your prices accordingly.
2. Higher pricing
To account for VAT, you will need to increase the prices you currently charge (or were planning to charge), otherwise your business will have to absorb the VAT charges itself, which is rarely feasible.
This could make the goods or services you sell less appealing to some customers, especially members of the public and non-VAT registered businesses. You should consider your main customer base and look at what your main competitors charge to determine whether your VAT-inclusive prices would be comparatively reasonable.
3. Unexpected VAT bill
There is potential for large or unexpected VAT bills if you frequently collect more VAT on sales than you are able to reclaim on purchases. However, good bookkeeping and cash flow management will help you to avoid this.
How do I register for VAT?
Registering for VAT is a straightforward process in and of itself. It’s free, and most businesses can register online by signing into their business tax account and completing a simple application form for HMRC.
If you have an accountant, you can ask them to register for VAT on your behalf. Whilst optional, we would recommend using an accountant to help you with your business tax affairs and accounting. It’s one less thing for you to worry about, and you’ll have more time to focus on running your business.
Thanks for reading
Unless you are legally required to register your business for VAT, it’s worthwhile considering the pros and cons of doing so.
Whilst there are myriad potential benefits, the extent to which these apply to your business depends on what you sell, who your customers are, and whether you pay VAT on the goods or services you buy for your business.
Hopefully, this article has given you an idea of what you need to think about when deciding whether registering for VAT is right for you.
For more business-related advice and guidance, visit Quality Company Formations blog today.