Running a business in the current economic climate can be challenging so the idea of voluntarily registering for another tax may seem counterintuitive at first.  However, many savvy business owners are leveraging the benefits of voluntary VAT registration to help take their business to the next level.

What is VAT

The first thing to understand is what Value Added Tax (VAT) is. You may have noticed VAT being added to a lot of your purchases in both your business and day-to-day life. VAT is the tax added to most goods and services in UK with the current VAT rate being 20% for goods or services. When a business charges you VAT, they are collecting money on behalf of HMRC.

If your business is currently not VAT registered, you cannot reclaim any of the VAT paid. Whereas as a VAT registered businesses you will add VAT to your original sales price you provide to your customers. Generally, your business can also reclaim VAT paid on the goods and services you have bought.

What Is the VAT Registration Threshold?

A business is legally required by HMRC to register for VAT when either:

  • The total taxable turnover exceeds £90,000 in the prior 12-month rolling period
  • There is an expectation that the VAT threshold will be exceeded in the next 30 days (E.g. from signing a new lucrative contract).

However, businesses can choose to voluntarily register for VAT even if they don’t meet the above criteria.

How can voluntary VAT registration benefit your business?

There are many benefits to voluntarily registering for VAT outlined below:

Reclaiming VAT on purchases

When VAT registered you will now be able to reclaim back VAT on your purchases from other VAT business. This means that the £1200 VAT inclusive invoice you have just received now only has an effective price of £1000.

Pre-Registration VAT reclaim

The VAT on goods purchased in the 4 years prior to registration will be reclaimable as long as they are still held by the business. E.g. the £2,000 of VAT paid when purchasing that expensive piece of equipment for £12,000, will now be reclaimable in your first VAT return.

The VAT on services can also be reclaimed for the prior 6 months before registration, this could be from your accountancy services, consultancy services, legal services etc.

Improve business professionalism image

VAT registration can disguise your business’ size and give the impression that it is more established than it currently is.

The reputation boost of VAT registration could help propel your business to new levels by not only attracting new high-quality customers but also aid in attractiveness to potential investors or lenders due to the enhanced professional image of the business.

Improved accuracy of record keeping

An often-overlooked benefit is improved accuracy of records. VAT returns are generally submitted quarterly and therefore require a more hands on approach than just a year-end return. However, come your year-end you will have already gathered and provided your information. This helps break down the year-end into more manageable quarterly tasks.

Mitigating the potential drawbacks of voluntary VAT registration

Whilst VAT registration can help accelerate your business growth and cash flow, it is worth bearing in mind potential drawbacks and how to mitigate these.

  • If your customers are non-VAT registered businesses, they will not be able to reclaim VAT on your invoices so the higher price may put them off if they’re price sensitive. However, for your customers who are VAT registered the extra cost of VAT will not impact them as they can recover the VAT on your costs, targeting VAT registered customers will help mitigate this effect.
  • Additional administration and more complex regulations are required for VAT registered businesses as they need to file VAT returns every quarter. At MJ Kane Accountancy we have many VAT experts to handle this additional burden for you and assist in making the transition.

Illustrative Example

Your sales are £50,000 and VAT reclaimable purchases are £24,000.

If you are to register for VAT, you will charge £50,000 plus 20% VAT. You will collect £10,000 on behalf on the government. However, you will also be able to claim back the VAT on your purchases of £4,000.

This will give you a net effect of paying £6,000 to the government and keeping the £4,000 from the VAT for yourself.

Interested in utilising Voluntary VAT registration to propel your business to the next level?

If your interested in voluntarily registering for VAT and want to discuss viability for your current business or prospective business contact MJ Kane Accountants today for specifically tailored guidance to utilise VAT to your benefit.

Author: Nathan Doherty