Pros and Cons of Being VAT Registered

When starting a new company, one of the most crucial decisions you’ll face is to register for VAT registration, and then the VAT calculation later on.

In the United Kingdom, VAT is a consumption tax that is levied on the sale of goods and services throughout the stage of production and distribution. As your taxable turnover approaches or exceeds the £85,000 threshold, you’ll either be legally required to register or can choose to do so voluntarily.

While some small companies may not reach the VAT threshold in their previous year, they might still decide to voluntarily register to manage finances more effectively and improve market credibility.

Before diving into the pros and cons of being VAT registered, it’s important to first understand the key definitions below to grasp the core concept:

Table of Contents

What is VAT?

VAT, short for value-added tax, is a type of consumption tax that applies to most goods and services bought and sold in the UK. Essentially, VAT is added at each stage of the supply chain where value is added to a product or service.

UK businesses, whether selling commercial or non-commercial goods, are required to charge VAT when they register and reach a certain taxable turnover.

If your business exceeds the VAT registration threshold, which is currently set at £90,000 for the 2024/25 tax year, you must register for VAT and charge VAT on all your products or services. The registered businesses then have the ability to reclaim VAT on purchases such as new equipment or company purchases like a business phone or even a new van.

VAT is applied to the sale price of goods and services sold, whether they are locally produced, imported from EU countries, or non-EU countries. There are different rates of VAT depending on the product or service, but the standard rate is 20%, which has been in place since 2011.

VAT is one of the biggest sources of government revenue, contributing to around 6% of national income.

What is Voluntary Registration?

Voluntary registration allows small businesses to register for VAT even if their turnover is less than the VAT registration threshold. This means they are not legally obliged to register for VAT but can choose to do so for various business reasons.

For some, becoming VAT registered voluntarily can enhance their credibility in the market or allow them to reclaim VAT on purchases, such as supplies or equipment. This can be particularly beneficial for businesses that deal with VAT registered customers or suppliers.

However, deciding whether to go down this route should be done with careful consideration and it’s always a good idea to discuss the decision with a professional.

Many businesses find that the benefits of voluntary registration can outweigh the administrative tasks, especially as they grow.

The pros and cons of being VAT registered are important to understand.

If you voluntarily register, it could give your business a more professional appearance, enhance your business finance management, and allow you to reclaim VAT on purchases. However, there are administration challenges to consider, such as maintaining accurate records and submitting VAT returns.

This can be a significant administrative burden, especially for those just starting out or without much experience.

Sole traders and limited company directors need to carefully evaluate the impact on their operational dynamics before making this decision, as it can affect your business finance and financial health.

Each business situation is unique, and understanding the advantages and disadvantages of VAT registration can help you make the right direction for your company’s long-term success.

Let’s discuss them specifically to know both the Pros and Cons of VAT Registration:

Advantages/Pros of VAT Registration

One of the primary advantages of VAT registration is the ability to reclaim VAT on products and services purchased for your business. This can provide a significant cash flow benefit, especially for small businesses buying machinery, stock, or IT equipment.
Voluntary VAT registration also helps to enhance the credibility of your company, as customers, suppliers, and investors may perceive you as more professional and trustworthy.
Displaying a VAT number on invoices, stationery, and company letterheads can further improve your business image and make you appear more established. Moreover, being VAT registered can open up opportunities for global trade and international transactions, where you can reclaim input VAT on imports or purchases from overseas partners.
If your business is turning over more than £85,000, it’s a legal requirement to register for VAT. However, even if your turnover is below this threshold, many businesses voluntarily register for VAT to gain a competitive edge and manage cash flow more effectively.
VAT registration can provide financial incentives by allowing you to reclaim VAT on capital assets or investments like machinery or vehicles, reducing your financial burden.
Additionally, for businesses contemplating growth and expansion, VAT registration may help attract larger clients or lenders, who often prefer working with VAT registered companies.

Disadvantages/Cons of VAT Registration

One of the cons of VAT registration is that it can add a significant administrative burden to your business. VAT registered companies must deal with VAT returns, which involve gathering receipts, invoices, and maintaining accurate documentation of all purchases and sales.
This complex record-keeping requires admin duties, including filing and documenting transactions, which can be time-consuming and divert valuable time away from your core operations. Additionally, businesses need to ensure they are always adhering to VAT regulations, which can be challenging and often requires advice from small business accountants to avoid errors.
Non-compliance or mistakes in VAT filings can lead to penalties and even VAT inspections by HMRC, further increasing your operational costs.
The impact on pricing and profit margins is another significant downside. When you charge VAT on your products or services, it can make your prices appear unreasonably overpriced, especially compared to non-VAT registered businesses.
While you can reclaim VAT on purchases, the cost of VAT invoices can still increase prices, and if the output VAT you collect is higher than input VAT, you may face a hefty bill. This unexpected VAT bill can create cash flow issues, especially with the time lag between paying suppliers and receiving payments from clients.
Balancing the costs of VAT with competitive pricing is a delicate task, as raising prices may affect how appealing your business is to end consumers, particularly in times of cost-of-living crisis.

How to Register?

If you’ve decided to become VAT-registered, the process is fairly straightforward. To start, you’ll need to register with HMRC Online Services through the Government Gateway.

You can complete the application online, and it typically takes around 3 weeks for HMRC to process your registration and provide you with your VAT registration number.

Once registered, you are required to charge VAT on all taxable invoices you issue. Depending on your business turnover, which must exceed the £85,000 threshold in the past 12 months, you’ll need to begin filing VAT Returns every 3-month VAT period.

These returns must be sent to HMRC, and you’ll need to ensure timely VAT payment before the VAT payment deadline.

To make the process smoother, consider using VAT-Registrations.co.uk or hiring an accountant to guide you through the application and any exemptions you may qualify for. Once registered, keeping accurate records of receipts and invoices is essential for managing VAT correctly.

Additionally, once you receive your HMRC number, you can adjust your prices to reflect the VAT charges. You’ll also be responsible for filing VAT Returns and accounting for VAT, which includes electronic submissions via your VAT online account.

Remember, the VAT payment deadline is crucial to avoid penalties, so it’s important to stay on top of your VAT registration process and filing VAT Return deadlines.

VAT Returns

When you are VAT registered, one of the key responsibilities is submitting VAT returns. This is a legal requirement for businesses that are either voluntarily registered or have exceeded the £85,000 turnover threshold.

Typically, you must file VAT returns every 3-month VAT period, detailing the VAT you’ve charged on sales and the VAT you’ve paid on purchases. The VAT payment deadline is crucial, with returns needing to be submitted to HMRC within one month and 7 days from the end of your VAT period.

If this sounds like a hassle, you can use accounting software to make the process easier by automating much of the work, or hire an accountant to ensure that everything is handled correctly. Proper budgeting and keeping track of your VAT affairs are essential for smooth business operations.

It’s also a good idea to monitor your VAT payments and be aware of any upcoming filing deadlines to avoid penalties. While VAT returns may seem like a time-consuming task, especially for small enterprises, they offer the pros and cons of VAT registration.

Filing on time and keeping up-to-date records will help you stay on top of your VAT payment responsibilities and contribute to your company’s overall financial success.

Conclusion

When making the decision to pursue VAT registration, it’s important to consider both the advantages and disadvantages before taking the plunge. As highlighted throughout this blog post, there are many aspects to think about, from the VAT registration process to the VAT returns you’ll need to submit regularly.

Keeping records, such as relevant invoices and receipts, will play a crucial role in making the process smoother and ensuring you stay compliant.

Whether you’re voluntarily registering or meeting the threshold, you must also factor in the potential need for hiring a professional accountant to manage VAT matters effectively, especially if you find the paperwork overwhelming.

For a small business, the choice to register could significantly impact your financial standing and position you more competitively in the market, especially if your target market includes businesses that expect VAT-included pricing.

Taking the time to think about your long-term goals and consulting with a professional can help you make an informed decision, ensuring that you’re financially stable and prepared for future growth.

Frequently Asked Questions:

Q1: What Are the Consequences of Avoiding VAT Registration?

Avoiding VAT registration can result in serious consequences, including VAT evasion, which is a criminal offense. HMRC actively investigates cases of non-compliance and prosecutes those found guilty of VAT fraud. If you don’t comply, you could face civil penalties, such as fines, interest, and default surcharges. In severe cases, criminal charges may be brought against you, and you could be subject to imprisonment. The penalties for failing to adhere to VAT regulations can be significant, so it’s essential to maintain proper compliance to avoid these serious repercussions.

Q2: Can Non-Registered Businesses Reclaim VAT on Purchases?

In the UK, businesses that are not VAT-registered are not eligible to reclaim VAT on their business expenses or purchases. This is because only VAT-registered businesses are entitled to claim back VAT under the taxation system. Unless a business reaches the VAT registration threshold, it is not eligible for VAT refunds on any purchases made.

Q3: What Happens If My Business Exceeds the VAT Threshold Temporarily?

If your business experiences a turnover that exceeds the VAT threshold within a 12-month period, you are legally required to register for VAT. Even if the increase in turnover is temporary, and the threshold is exceeded, you have 30 days to apply for VAT registration. It’s important to note that the VAT registration obligation arises once your business expects or exceeds the limit, and failure to comply may lead to penalties.

Q4: What Are the Main Difficulties of Ensuring VAT Compliance?

Ensuring VAT compliance can present numerous challenges for businesses, especially when it comes to understanding local regulations and staying updated on registration thresholds. Issues often arise when calculating accurate VAT, adhering to strict filing deadlines, and meeting invoice requirements. Additionally, international transactions and e-commerce compliance can complicate the VAT calculation process. Businesses may also face difficulties when it comes to reclaiming VAT on expenses or when navigating complex situations with multiple VAT rates.

Q5: How Simple Is It for Businesses to Manage Their Own VAT?

For businesses with relatively straightforward operations, completing a VAT return can be relatively easy. Maintaining accurate digital records for the quarter makes the process smoother, and for many, it’s manageable. However, more complex situations, such as those involving international transactions or multiple VAT rates, may complicate the process. Reclaiming VAT on expenses can also be a challenge, especially if the business does not have the necessary tools or expertise to maintain accurate records. For some businesses, especially those with growing operations, consulting a professional accountant may be advisable.