When starting a new company, be prepared to adhere to a number of inevitable legalities, such as your VAT registration. You must legally register for VAT when your taxable turnover (not your profit) for the previous year exceeds £85,000 (or is expected to do so within the following 30 days).
However, some small companies may choose to voluntarily register for VAT even though their taxable turnover will not exceed £85,000. And before we outline the pros and cons of being VAT registered, let’s briefly observe the definition of VAT.
VAT stands for “value-added tax” and is a consumption tax placed on a product whenever value is added at each stage of the supply chain. For UK businesses that are VAT-registered, there is a VAT charge on the majority of products and services they provide. VAT is also added to some goods and services that have been imported from some EU and non-EU countries.
When these products and services are sold to both commercial and non-commercial businesses, VAT is added to the sale price of these goods by VAT-registered companies. Conversely, VAT-registered businesses can normally reclaim the VAT paid when buying products or services.
And since there are invariably two perspectives to most things, let’s look at the both sides of the VAT coin and explore the pros and cons of being VAT registered (voluntarily).
The Pros of Being VAT Registered
Since the £85,000 figure for VAT registration is a legal threshold, the discussion of the advantages/disadvantages of VAT registration seems irrelevant. However, for companies that seek voluntary VAT registration, there are a number of advantages to gain (of course, these also apply to companies who are legally required to register for VAT):
- You can apply VAT to the sale of almost any product or service.
- You can reclaim VAT on most products or services purchased from other companies.
- It’s great for marketing — small businesses who are VAT registered can enhance their image by appearing more credible. This will not only appeal to their customers, but also their clients, investors, suppliers, etc. who may assume the company is turning over more than £85,000 because of VAT registration.
- Likewise, many businesses prefer not to work with other businesses that are not VAT registered as they may be perceived as being “too small”, hence VAT-registered businesses are given a VAT number that can be displayed on company letterheads, invoices, stationery etc as evidence of credibility/VAT registration.
- Companies who register for VAT on a voluntary basis can backdate their registration by up to four years in order to reclaim VAT paid on equipment that they are currently using. However, sufficient evidence must be supplied to HMRC.
The Cons of Being VAT Registered
If your company does not have a turnover that exceeds £85,000 then you needn’t worry about the following, seemingly disadvantageous, points relating to VAT registration. Therefore, when you weigh up the pros and cons of being VAT registered and consider the following cons to far outweigh the pros, you should ignore the option of voluntary VAT registration:
- Some of your clients and customers may not be VAT registered (which means they cannot reclaim the VAT on items) and therefore any products or services that you sell with VAT may be too expensive or unreasonably overpriced for these customers.
- HMRC can potentially hand your company a hefty bill if you generate more VAT from products and services that you sell compared to the VAT that you have paid on products and services purchased from other companies.
- VAT-registered companies have to maintain stringent admin duties, particularly recording and documenting all VAT invoices and receipts and filing their VAT returns every three months. Such paperwork is unavoidable for VAT registered companies.
How to Become VAT Registered
In order to become VAT-registered you have to sign in to HMRC Online Services — it’s a fairly straightforward process and takes HMRC approximately two weeks to process the application.
Notably, you’re not permitted to charge VAT or display any such charges on invoices until you receive your HMRC number. However, you can adjust your prices to reflect the amount of VAT you will soon be charging.
VAT Returns are normally completed online for every 3-month VAT period. They have to be sent to HMRC within one month and 7 days after the end of the VAT period. VAT payments have to be made to HMRC electronically.
The VAT payment deadline is normally the same as the deadline for filing your VAT Return.
The legal requirement to become a VAT registered company should not be seen as a negative; it means that you have a significant turnover and have enjoyed a certain level of financial success.
However, if you still feel that your small enterprise needn’t voluntarily register for VAT after examining the pros and cons of being VAT registered, then you can continue to operate as you have previously done so. Remember, if you’re not VAT-registered, you cannot charge or reclaim VAT on anything you sell or purchase.
The most important thing to remember when you do register for VAT is to begin keeping records and accounts with all relevant invoices and receipts. If you don’t feel comfortable, or lack time, to submit and complete the VAT registration process and handle all subsequent VAT matters, then you should consider hiring a professional accountant.
To find out more about the pros and cons of being VAT registered, contact our professional and reputable company formations team who will help you every step of the way.