When do I need to register for VAT and is there ever any benefit in registering voluntarily? Below we look at the rules surrounding VAT registration and the factors to bear in mind when considering registering for VAT early.
First, the rules….
Currently a business must register for VAT if the total taxable turnover for the last 12 months was over £85,000. This is known as the VAT threshold. In this case, you must register within 30 days of the end of the month when the VAT threshold was exceeded.
In addition to the above test, businesses must also look ahead and register for VAT if it is expected that the business will pass the VAT threshold for the rolling 12 month period within the next 30 days. In this case, you must register by the end of that 30 day period.
Your total taxable turnover is the total of all your sales, excluding any exempt sales. Exempt sales include services, such as insurance, financial services, education, and healthcare. A full list of VAT exempt sales can be found here:
https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services
Should I register for VAT voluntarily?
Some businesses may consider registering for VAT early, before they meet the VAT threshold.
Outlined below are some of the factors to consider when making this decision:
#1 – Reduction in costs
Once registered, you can reclaim the VAT on purchases and business expenses, reducing the cost of these in the profit and loss account.
#2 – Impact on cashflow
For a business which pays out more VAT on purchases than it collects on sales, there is a clear cashflow benefit of VAT registration, as the business will be a net reclaimer of VAT and receive refunds from HMRC each VAT period. Examples may include businesses with predominantly zero rated sales, such as a builder specialising on new build properties, or a UK based business selling overseas.
Conversely, a business with very few VATable purchases will need to factor in VAT payments into its’ cashflow forecast, ensuring there is sufficient money in the bank to cover these lump sum payments each quarter.
It is worth noting that a business with only VAT exempt sales cannot register for VAT.
#3 – Avoiding penalties for late registration
For a growing and busy business, it may be preferable to register early to avoid missing the £85,000 VAT threshold point, and the penalties and backdated VAT payments which may then follow from this.
#4 – Improving the business’ status
Depending on the industry, VAT registered businesses may be seen as more credible, stable and legitimate, enabling the business access to contracts with larger businesses, than may otherwise be possible.
#5 -Impact on sales prices
For a business selling to other VAT registered businesses, there should be no impact on competitiveness due to VAT registration, as your customers can simply reclaim the VAT on your invoices on their VAT returns.
However, for a business selling to the public, VAT registration will make your goods and services more expensive, and less competitive compared to other non-VAT registered businesses. This could lead to a loss of sales, and make voluntary VAT registration much less favourable.
#6 -Increased administration burden
A VAT registered business needs to keep complete, and up to date accounting records, along with source documentation to support the VAT return. There are a whole host of rules covering the VAT treatment of different goods and services to keep aware of, and of course VAT returns need to be checked and submitted on time each VAT period.
So is registering for VAT worth it?
As you can see, there are a number of factors to look at when considering whether voluntary registration would be beneficial to the business. It is important to consider the impact over the long term, as opposed to focusing on a potential short term cash injection into the business.
If you decide now is not the right time to register, it is worth noting on registration that you can claim back VAT on transactions made before the date you registered, provided you still own the items. The general rule is 4 years for goods, and 6 months for services.
When it is time to register, it is important to select the best VAT scheme for your business.
Need more help understanding tax legislation or VAT? Get in touch with our Leeds Accounting team today.