There’s a lot to think about when you’re running your own business or considering starting your own business. You need a solid business idea and plan. You need to secure financing and ensure that your marketing gets your product or services in front of potential customers. But one of the big things you’ll need to consider is tax and VAT.
While all businesses in the UK are required to pay tax, many companies are not required to register for value-added tax as they do not meet the VAT threshold. According to the ONS, only 45% of businesses are registered for either VAT or PAYE. However, some companies voluntarily register for VAT to enjoy the benefits of being a VAT-registered business.
If you are a business owner in the UK, you may be wondering if you should register for VAT or not. This guide will provide an overview of VAT registration, what it entails, and the advantages and disadvantages of registering so that you can make an informed decision about whether or not to register.
Discover what you need to know:
- What Is VAT?
- What Is Voluntary VAT Registration?
- Voluntary VAT Registration Advantages
- Potential Disadvantages of Voluntary VAT Registration
- How to Register for VAT in the UK
- Become VAT Registered with Mint Formations.
What Is VAT?
In the United Kingdom, value-added tax (VAT) is a consumption tax placed on most goods and services. The current standard rate of VAT is 20%, although there are reduced rates of 5% and 0% for VAT-exempt items such as children’s clothing, books, and food.
VAT-registered businesses must charge it on sales and file quarterly returns with HM Revenue and Customs. They can also claim back any VAT paid on purchases made for their business.
Most businesses in the UK are eligible to register for VAT, but there are some exceptions, such as charities and certain types of companies with low turnover. There are also special rules for particular transactions, such as importing and exporting goods.
Value-added tax is a complex area, so seeking professional advice is essential if you’re unsure whether or how much VAT you should be paying. However, understanding how VAT works can save your business money and help you to stay compliant with the law.
Read our complete guide to VAT in the UK.
What Is the VAT Registration Threshold?
The VAT registration threshold is the turnover limit below which businesses are not required to register for VAT. The UK’s current registration threshold for VAT taxable turnover is £85,000. Businesses with a turnover below this amount do not need to charge VAT on their products and services.
However, businesses can choose to register for VAT even if they are below the threshold, and many do so to reclaim the VAT they have paid on their own purchases.
The registration process is simple and can be completed online. Once registered, businesses will need to file regular returns — usually quarterly — and make payments to HMRC. The VAT registration threshold is an important consideration for any business, and it is worth seeking professional advice to ensure that you comply with the rules.
What Is Voluntary VAT Registration?
Voluntary VAT registration is when a business registers for VAT even though they are below the VAT registration threshold. You might want to do this because it could benefit your business.
For example, if you are registered for VAT, you can claim back any VAT you have paid on business expenses. This is called “input tax”. You can also charge VAT on goods and services you supply to other VAT-registered businesses. This is called “output tax”. If the total value of your “output tax” is greater than that of your “input tax”, you will need to pay HMRC the difference. Another benefit of being a VAT-registered business is improving your credibility with customers and suppliers.
Voluntary registration might not be suitable for everyone, so it’s essential to speak to an accountant or another financial advisor before making a decision. They will be able to help you work out whether voluntary registration makes financial sense for your business.
Voluntary VAT Registration Advantages
1. You Can Reclaim VAT
If you’re registered for VAT, you can reclaim the VAT you’ve paid on any goods and services you’ve bought from other VAT-registered businesses. This can be a significant saving, particularly for companies with high expenditure levels.
2. Gives Your Business a More Professional Image
In your customers’ eyes, voluntary registration signals that your business is professional and trustworthy. And as we all know, first impressions count. It can also be a benefit if you are ever looking for outside investment for your company. Like customers, investors see VAT registration as a strong trust signal.
3. Encourages Business with Other VAT-Registered Companies
If your customers are also registered for VAT, they can reclaim the VAT charged on your invoices. As a result, they may be more likely to do business with you if you’re registered for VAT.
4. Simplifies Your Bookkeeping
Keeping track of VAT can be time-consuming and complicated, but if you’re registered for VAT, you can use the more straightforward cash accounting scheme. This means you only need to record the total value of each invoice without deducting the VAT element. All you’ll need to do is pay the total VAT due to HMRC each quarter. Registering for VAT can save you both time and money in the long run.
Potential Disadvantages of Voluntary VAT Registration
1. You May Trigger an Audit
If you voluntarily register for VAT and begin charging VAT on your sales, you may trigger an audit from your local tax authority. This is because voluntary registration for VAT puts you on the radar of the tax authority, and they may want to take a closer look at your business to ensure that you are correctly charging and remitting VAT.
An audit can be a time-consuming and costly process, so it’s something you may want to avoid
2. You May Owe Money If Your Sales Decline
Another disadvantage of voluntary registration for VAT is that you may end up owing money if your sales decline after registering. This is because businesses are required to pay quarterly instalments of VAT based on their sales from the previous quarter.
So, if your sales drop off after you’ve registered, you may find yourself in a difficult financial position trying to make your VAT payments on time.
3. You Will Have to Comply with More Complex Regulations
As a business owner, compliance with regulations is always a top concern. When you voluntarily register for VAT, you will be subject to the same regulations as businesses that are required to register for VAT.
You will have to keep meticulous records of your sales and purchases and submit quarterly returns to the tax authority. Depending on the size and complexity of your business, this could be a very time-consuming and daunting task
4. You May Lose Competitive Advantage
If all of your competitors are not registered for VAT, registering voluntarily could put you at a competitive disadvantage. Consumers will perceive your prices as higher than your competitors since they will not include VAT, while yours will. As a result, you could lose market share to your unregistered competitors.
How to Register for VAT in the UK
Voluntary VAT registration in the UK can have advantages and disadvantages for businesses. When deciding whether or not to register for VAT, you should carefully consider their specific circumstances and needs. Professional advice from an accountant or other financial advisor may be beneficial in making this decision.
If you’re planning to register for VAT, here’s how to do it in three simple steps:
Step 1: Check If You Can Register for VAT
If your business is based in the UK and you provide taxable goods or services, you may need to register for VAT. However, there are a few exceptions. For instance, if your annual turnover is below £85,000, you may not need to register for VAT. You can check the complete list of exceptions on the gov.uk website.
Step 2: Choose Which VAT Scheme to Use
There are various VAT schemes available in the UK, so you’ll need to choose which one is right for your business. The most popular scheme is the Standard VAT Scheme, which is best suited for companies with simple VAT affairs. Other schemes include the Flat Rate, Cash Accounting, and Annual Accounting.
Step 3: Register for VAT
Once you’ve determined that you need to register for VAT and chosen which scheme you want to use, you can register online via the gov.uk website. You’ll need to provide your contact information, bank details, and National Insurance number. You should also have your company registration number handy.
Become VAT Registered with Mint Formations for £29
Registering your business for VAT with Mint Formations is quick and easy, and our friendly team is always on hand to help. The process starts with a simple online form, which takes just a few minutes to complete. Once we have all the information, we’ll move forward with your VAT registration application on your behalf. We’ll keep you updated throughout the process, so you’ll know what’s happening.
Register your business for VAT with Mint Formations today for as little as £29. We handle all the paperwork so you can focus on the important things like running your business.
