The answer to the question – when should I register for VAT, is slightly more complex than would first appear, as there is a time when you must legally register for VAT; however, there is also the option to register on a voluntary basis.
Let’s first of all deal with compulsory registration for VAT, and then discuss why a business would want to become VAT registered on a voluntary basis.
You must register for VAT, or Value Added Tax when:
- Your VAT taxable turnover is expected to exceed £85,000, known as the VAT registration threshold, within the next 30 days. You should register as soon as become aware of this eventuality. You should register before the end of this 30 day period and the effective date of your VAT registration should be the date you realised you were going to go over the threshold and not the date your turnover exceeded it.
- Your VAT taxable turnover exceeded £85,000 (‘the threshold’) over the last 12 months. You then have 30 days from the end of the month you exceeded the threshold, to register for VAT.
‘VAT taxable turnover’ is the total turnover of all goods and services sold, that are not VAT exempt. The vast majority of goods and services sold in the UK are taxable; however, some are not, e.g. insurance, finance, education, training, and letting of commercial land and buildings. Please also remember we are talking about turnover and not profit, so some new businesses will have to get VAT registered fairly quickly.
If you fail to register for VAT at the correct time, HMRC may penalise you. The amount of the penalty is calculated as a percentage of the amount of VAT owed. The percentage penalty rate applied, will vary from 5% to 15% depending on how late you were in registering.
Many businesses decide to register for VAT even though their taxable turnover is below the threshold. This is known as registering on a voluntary basis and businesses do so, to take advantage of the benefits of VAT registration. It is estimated approximately 20% of all VAT registered businesses in the UK operate below the VAT registration threshold.
The benefits of VAT registration:
- You get a VAT number which you can display on your website and business stationery, which adds credibility and helps promote a bigger business image than you may actually be. The reputational benefits of VAT registration are considerable and should not be underestimated.
- Many customers, suppliers, lenders and investors may consider VAT registration as the ‘norm’ and may have a policy of not dealing with businesses that are not registered. Also, if you are not registered for VAT, other businesses will know your turnover is less than a certain amount and they may make judgements about your company on that basis.
- You can recover VAT paid on the purchase of goods and services. So if your business buys a lot of materials or equipment, this can be a substantial benefit. Indeed, if the VAT that you pay out (‘input tax’), is greater than the VAT you collect from customers (‘output tax’), HMRC may actually send you money for a change!
- You may be able to recover VAT you have paid, from the past 4 years, on items you are still using in your business. Being successful in this endeavour will be dependent on the maintenance of good record keeping, as VAT invoices will be required to substantiate your claim.
- If most of your customers are VAT registered businesses, they will not mind being charged VAT as they will be able to recover it from HMRC. This being the case, your business will most likely benefit from being VAT registered, as you will be able to recover VAT on purchases.
- You will no longer need to worry about incurring an HMRC penalty for not registering at the correct time.
Some disadvantages of VAT registration:
- Being VAT registered may generate more administration work in dealing with VAT records, and preparing / filing VAT returns.
- If your customers are the general public (or predominantly non-VAT registered businesses), and cannot recover the VAT you charge on your goods or services, they may resent having to pay an inflated price which includes VAT.
- If your competitors are not VAT registered, the inclusion of VAT on your goods or services may render you uncompetitive.
It is important you understand VAT, the ‘VAT threshold’ and when you are legally required to register for VAT.
It is also essential to be aware of the benefits of voluntary registration for VAT if you are operating below the all-important threshold. Whatever decision you make with regards VAT registration, it is a good idea to always consider the effect it will have on your customers.
If you need more information, HMRC’s VAT registration guide provides detailed information including how to register, and when to register.