One of the most common questions we are asked is whether a business should voluntarily register for VAT.
If throughout the course of a rolling 12-month period, your turnover exceeds the VAT registration threshold (which is currently set at £85,000), legally you must be VAT registered. Most businesses are aware of this and if turnover is below the threshold will not register for VAT.
There are advantages and disadvantages of VAT registration and it’s important that all businesses look at these so that they may make an informed decision.
Advantages of voluntarily VAT registration
As we’ve already stated, most businesses are aware of the VAT threshold and by voluntarily registering for VAT may give the impression that your business is bigger and more successful than it is. This is particularly useful in the infancy of a new business when quoting for work. By providing a VAT number, it suggests that turnover is above the VAT threshold and the business may be bigger than it currently is so that you appear more appealing to potential customers.
Every business will be aware of their turnover for the current year and the previous year but VAT registration is calculated on a rolling 12-month period. In times of growth, it becomes incredibly easy for a business owner to fail to notice that turnover has exceeded the threshold. If you fail to register at the correct time, you could be subject to fines and penalties. By registering voluntarily, you do not have to worry about exceeding the threshold or not notifying HM Revenuer and Customs on time.
Whilst you will need to charge VAT on your services, you are able to reclaim VAT that you are charged by other businesses for goods and services. This is particularly beneficial if your business purchases a large quantity of materials.
If your VAT rated purchases, exceed your VAT rated sales in a quarter, you can reclaim VAT back from HM Revenue and Customs in VAT refunds. The VAT refunds are issued shortly after your VAT return has been submitted and the refund can be paid directly into your bank account.
Voluntary VAT registration will allow you to reclaim VAT from the last 4 years on certain expenditure. So, if you have been in business for a while, you can reclaim VAT on certain costs so long as you have kept the proper VAT records and invoices.
Disadvantages of voluntarily VAT registration
Your business needs to maintain clear records throughout a rolling 12-month period and file a VAT return with HM Revenue and Customs every quarter. The VAT return needs to be submitted within 5 weeks of the quarter-end so business owners need to keep on top of their accounting records to be able to submit a VAT return.
Although you need to maintain clear records and file a VAT return to HM Revenue and Customs every quarter, it’s vital for any successful business to maintain clear records whether VAT registered or not. Whilst having to submit a VAT return to HM Revenue and Customs is a disadvantage, if records are being maintained accurately and efficiently, the VAT return can be submitted easily and quickly.
Customers that are not VAT registered may by put off using your business due to the additional 20% VAT charge, compared to using a non-VAT registered company.
This point is critical to any business and assessing whether you should voluntarily register for VAT will depend on how this will impact your customers. For those customers that are VAT registered, there is no impact whatsoever because the VAT you charge on your sale will be recovered by your customer on their VAT return. For customers who are not VAT registered, your business becoming VAT registered will have a direct impact on their cost. A business needs to ascertain what impact this would have and decide accordingly.
Assuming that your customers are VAT registered, a voluntary registration can increase your profits as detailed in the example below:
|
|
Not VAT Registered |
|
VAT registered |
|
|
£ |
|
£ |
|
Turnover |
70,000 |
|
70,000 |
|
|
|
|
|
|
Vatable purchases |
48,000 |
|
40,000 |
|
Non-vatable expenses |
12,000 |
|
12,000 |
|
|
|
|
|
|
Profit |
10,000 |
|
18,000 |
In the example, VAT would be charged on turnover and a total of £84,000 would be received from customers. VAT on purchases would be offset against the VAT received and a total of £6,000 would be paid to HM Revenue and Customs through the quarterly VAT return process. Profits for the year however would increase from £10,000 to £18,000 leading to more money for business owners to either withdraw or reinvest.
Whether to voluntarily register for VAT isn’t straight forward. As we have explained, there are advantages and disadvantages to registering and registration could be beneficial. We work with clients to provide specific advice for them so that they understand what impact voluntary registration would have on their business so that informed decisions can be made.
If we can be of any assistance, contact us on 0161 952 4244 for more information.