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The pros and cons of voluntary VAT registration

VAT registration can be a confusing area for many businesses. Some are legally required to register for and pay VAT, whilst for other businesses it is a voluntary matter determined by certain advantages and disadvantages attached. If you are not obliged to register it is still worth considering whether it could be beneficial for you and your business.

A business must register with HMRC for VAT when:

Its taxable turnover for the previous 12 months is more than the threshold of £81,000 (2014-15), or it is expected to exceed that figure within the next 30 days.

The business receives goods in the UK from the EU worth more than £81,000.

The benefits

‘Taxable turnover’ is any product or service sold by a business that is subject to VAT and it is important to note that the threshold applies to ‘turnover’, not ‘profit’, which means many businesses will be obliged to register. For small businesses that do not expect to reach or exceed this threshold, voluntary VAT registration can be very important and could actually offer a number of benefits:

It allows VAT to be charged on goods and services sold (known as output tax).

A business can reclaim any VAT charged on goods and services purchased from other businesses (known as input tax). This is particularly advantageous if you sell a zero-rated product and purchase a standard rated product because you may be eligible for VAT refunds from HMRC.

It can make a small business appear larger and more established – this could be more impressive and appealing to other businesses and clients. If your business is not registered for VAT, competitors and other firms will know that your turnover is below the £81,000 threshold.

VAT registration comes with a VAT number that a business will display on its website, correspondence and invoices. This often makes other firms more willing to do business with smaller companies – many large firms and companies, particularly those in the finance sector, will not even consider doing business with another firm if it has no VAT number. It can also be advantageous to be able to produce a VAT invoice if requested by a client or customer.

Businesses can apply to HMRC to backdate voluntary registration by up to four years, provided all relevant evidence can be produced.

There are also a number of potential drawbacks to voluntary VAT registration.

The downsides

Voluntary VAT registration also has a few drawbacks, namely potentially higher costs and additional paperwork.

Charging VAT on products may be unappealing to some potential or existing customers, particularly if they themselves are not VAT registered. It is important to ensure VAT registration does not impact the desirability of your service or product by making it appear over-priced and unreasonable.

If output tax exceeds input tax, a business will be required to pay the difference to HMRC. This could cause potential problems if a business is faced with a large, unexpected VAT bill.

VAT registration comes with the added burden of extra administration and paperwork – businesses will have to maintain accurate VAT accounting records and invoices and submit a quarterly VAT return. Although this can be a disadvantage for some, voluntary registration is worth the extra work for many businesses.

If voluntary registration turns out to be the wrong decision or VAT is no longer applicable, you may be able to de-register if your taxable supplies are mainly zero-rated, or turnover has not exceeded or is unlikely to exceed the VAT threshold over a 12-month period. HMRC should be informed of the date your business would like VAT registration to stop and you should continue to charge and account for VAT until confirmation is received from HMRC.

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