Should You Voluntarily Register For VAT?

You are considering starting up a new business venture and the outgoings are racking up fast. You need to purchase equipment up front, sign leases, pay consultants etc, most of these businesses are likely to be VAT registered. You are currently not trading and therefore haven’t even considered being VAT registered.

But is there a case for voluntary registration prior to getting to the £90,000 compulsory limit? In other words, registering for VAT when you don’t actually have to? Seems a bit crazy but there may be good reasons for considering this and it all depends on individual circumstances.

Registering for VAT

You must register for VAT once your turnover passes £90,000 or at the point during the year when you expect your VAT taxable turnover to be more than £90,000 in the next 30 days.

Once you’ve registered, you must, charge VAT on top of your goods and services to the end users. In most cases this will be 20% but there will be some products which are rated at 5% VAT and others which are zero rated. In most cases however, it’s fair to say that you will have to charge 20% VAT on (almost everything).

When you sell something, you collect the 20% VAT you charge customers – this is your output VAT. The VAT you pay on your supplies is your input VAT. At the end of the VAT period, you add up all your output VAT, subtract the total input VAT you’ve paid and then you either pay HMRC the difference or they pay you it.

When you sell to the public, they will not be able to claim VAT back and all they’ll really see is that you’ve put your prices up by 20%.

So, in addition to the extra paperwork that being VAT registered involves, there are serious business considerations to think about too. So, what are the pros and cons?

Advantages of registering for VAT

Deciding whether to register for VAT voluntarily before the registration threshold is reach is a big decision. It is vital therefore, that the matter is given careful consideration. There are several positive reasons supporting voluntary registration, including:

• The number one reason we will consider in this article is that you can claim VAT on certain items that you purchased prior to the date of VAT registration. Talk to your accountant about the exact details.

• If you are in a VAT reclaim situation then you will definitely be better off.

• You’ll appear to be a bigger business if you’re charging VAT, as the current limit for compulsory registration is £90,000 on VATable turnover (2024/25).

• Maintaining up to date records will provide better information for running your business.

Here’s an example of how being VAT registered can help:

Sandra is starting a new gym and has on order £120,000 (£100,000 + 20% VAT) of strength and cardio equipment. Being a non-VAT registered business, Sandra will have to accept this amount as a full cost to the business and set this against her business profits for corporation tax. However, if the business was VAT registered, Sandra would claim the output VAT (£20,000) back from HMRC, as she is still in start-up mode and hasn’t received any income yet. This would be a saving of £20,000 cash and give Sandra a better cash position.

Disadvantages of registering for VAT

As we mentioned earlier, registering for VAT could put you at a price disadvantage over non-VAT-registered competitors because you have to add 20% to everything you sell. There is more paperwork and administration involved too.

• There can be increased admin and bookkeeping costs.

• If your customers are not VAT registered themselves then you will immediately appear 20% more expensive when you add VAT onto your price.

• You will also have to make VAT payments to HMRC once a quarter/month/year if your input VAT is lower than your output VAT. This will need to be factored into your cashflow forecasting.

• You could end up paying penalties if you do not file and pay the VAT on time. HMRC give you a month and seven days to file your VAT and pay anything you owe over.

VAT Is non-registration preferable?

VAT registered businesses supplying goods and services to private individuals often feel dis-advantaged compared with their non-registered counterparts because they have to charge an additional 20% to their clients.

It is important to consider your business plans and forecasts, if you believe you will be above the VAT threshold in the near future then it may be worth registering early to reclaim your output VAT (VAT on supplies). You will also want to set your price at the start and not have to suddenly increase it by 20%.

Purchases made before registration

There is a time limit for backdating claims for VAT before registration. From your date of registration the time limit is:

·       4 years for goods you still have, or that were used to make other goods you still have

·       6 months for services

You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your “business purpose”. This means they must relate to VAT taxable goods or services that you supply.

In summary, every business owner will need to consider their own circumstances and future plans before deciding if to voluntarily register for VAT. If you would like more help in deciding if to register then please contact me to discuss.

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