VAT registration – the pros and cons

VAT registration – the pros and cons

VAT registration is a requirement for businesses in the UK when their taxable income for the previous 12 months exceeds £85,000 (2017-18 threshold) or is expected to exceed that figure within the next 30 days, or they receive goods in the UK from the EU worth more than £85,000. Businesses can also opt for voluntarily VAT registration if their taxable turnover is less than £85,000. This can be very beneficial for many new and small businesses.

Please note: ‘Taxable turnover’ is the amount of money a business makes from selling products and services, as opposed to ‘taxable profit’, which is the surplus income left over after all costs and expenses have been deducted from overall income.

Pros and cons of VAT registration

The pros:

  • Your limited company can charge Value Added Tax on the goods and services it sells. This is known as output tax.
  • Companies can reclaim VAT that they have paid on goods and services bought from other businesses. This is known as input tax.
  • Businesses are eligible for VAT refunds if they sell zero-rated products or services and purchase standard-rated products or services.
  • Voluntary VAT registration can make your company appear larger and more established. This can be particularly appealing to other VAT registered businesses and clients.
  • Displaying a VAT number on websites, business correspondence, invoices, and receipts may encourage larger firms to do business with your company. Many big companies, particularly those in the finance sector, will not even consider doing business with another firm if it doesn’t have a VAT number. It can also be advantageous to be able to produce a VAT invoice if requested by a client or customer.
  • Voluntary VAT registration can be backdated by up to 4 years if you can provide HMRC with the required evidence.

The cons:

  • Charging VAT on certain products and services may be off putting to 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 product or services by making them appear overpriced.
  • 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 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 VAT registration turns out to be the wrong decision, or VAT registration is no longer required, you can cancel your registration at any time.

How do I reclaim VAT?

VAT can usually be reclaimed on any goods and services that are bought for business use, even if they are purchased before a business is VAT registered. VAT on anything that is purchased for both personal and business use can only be reclaimed proportionately – this may include things like telephone line rental, phone calls and internet costs, laptops, and utility bills in a private residence that is also used for business purposes.

It is important to keep records and valid VAT invoices to support these claims. You will also have to show how you reached the figures for the VAT you are reclaiming.

It is not possible to reclaim VAT on:

  • Anything that is purchased exclusively for private use.
  • Business entertainment costs, goods and services used to make VAT exempt supplies.
  • Products purchased from other EU countries, receiving business assets that are transferred as a going concern.
  • Anything purchased under a VAT second-hand margin scheme.

How do I cancel my VAT registration?

VAT registration must be cancelled when a business is no longer eligible to be registered. This applies to companies that stop trading or making VAT taxable supplies, or join a VAT group. Businesses have the option of cancelling their VAT registration at any time if their VAT taxable turnover falls below the current threshold.

To de-register your company for VAT, you must contact HMRC online or by post within 30 days of your reason for wanting to cancel, and you should provide notification of the date from which you wish your VAT registration to cease. Until this date, you should continue to charge and account for VAT.

HMRC will contact you within approximately 3 weeks to confirm the official date of de-registration. You will be required to submit a final VAT return. You must keep all VAT records for 6 years from this date.

Optional VAT Flat Rate Scheme

Businesses normally pay or reclaim VAT based on the difference between the VAT charged on sales and the VAT paid on purchases. The Flat Rate Scheme was introduced to reduce the administrative burden on small businesses by allowing them to pay HMRC a fixed rate of VAT. This means that businesses can keep the monetary difference between what they charge and what they pay in VAT, but they can only reclaim VAT on the purchase of capital assets over £2,000.

To be eligible to join this scheme, a business must be VAT-registered and have an annual VAT taxable turnover of less than £150,000 (excl. VAT). You can join the Flat Rate Scheme online when you register your company for VAT.

20 Comments

  1. Hello, and thank you for this enlighting post.

    I am a non-UK resident and want to setup a limited company in the UK.
    It is a web-based company and my webservers (hosting) are in Germany, so my question is: Can I reclaim the VAT that I pay in Germany for my company server?

    Thank you for your time.

    Ian M.

    • Dear Ian,
      We are not accountants so cannot advise on the application of Vat in specific situations. We would advise contacting an accountant for advice specific to your requirements.
      Best regards,
      Rapid Formations Team

      • Hi good people can anyone enlighten me with the costs and benefits of vat system on local businesses? thanks

  2. I am a sole trader. Can I claim the vat back for materials I buy in for the work I do. Automative Trimmer. My over all costs for the work I do is 2/3rds materials. I am under the 83k threshold. if so how far back can I claim. I have been trading 7 years .

    • Dear Steve,
      Unfortunately we are not accountants so cannot advise on the treatment of your vat costs. I would suggest you contact an accountant about this.
      Best regards,
      Rapid Formations Team

  3. If I choose to register for VAT before my company passes the £83k threshold, I understand that 1. I am obliged to charge VAT on products sold to consumers from the date of registration, but 2. I can clim back VAT on purchases made upto 4 years ago (as long as the purchases are still in hand). Is that correct?

  4. I wish to start a charter boat company, and purchase a boat listed at £150,000 Excl VAT. Do I need to pay the VAT as it is for commercial use? Do I pay at time of purchase and claim it back?

    • Dear Christian,
      Thank you for your message.
      Unfortunately we are not able to advise on VAT matters such as this, so I would suggest you seek professional advice regarding the treatment of the vat on the boat.
      Best regards,
      Rapid Formations Team

  5. Can you help please
    If my business goes to 83 thousand pounds do I have to pay VAT for that 83 thousand pounds even though I have not charged my customers VAT
    Is that something I would have to find from my business
    Thank you

    • Dear Liz,
      Thank you for your message. You only have to charge vat from the date you register for vat. The date of registration should at least be from the date where you break the £83,000 threshold (in the previous 12 month period) so you would not be liable for vat on sales prior to the date of registration.

      Best regards,

      Rapid Formations team

  6. Just reading all this. So if you are not VAT registered you cannot claim vat back at all. So what happens when a utility company does say £3000 of work on your farm and charges VAT. Surely you can say we are not VAT reg. so they should quote the bill without VAT?? I work for a chemical company and a few people whom have bought from us say that they are not VAT registered. We then have to figure out how to set the VAT rate at zero? is this right? Can you explain all this to me in layman terms please

    • Hi Anthony,

      If your business is not VAT registered, you cannot charge or show VAT on your invoices, nor can you reclaim VAT on any purchases made. VAT-registered businesses charge VAT regardless of whether or not the customer is VAT registered. Consumers pay VAT on most purchases, but it’s normally included in the display price so we don’t tend to notice that we’re paying it.

      Regarding the chemical company – if it is VAT registered, the customer still has to pay VAT, even if they themselves are not registered for VAT. You do not omit this tax.

      I hope this helps. If you’re still unsure, I would recommend speaking to an accountant to determine if it’s swarth registering your business for VAT.

      Best wishes,

      Rachel Craig

  7. Hello Rachel,
    Can you please explain the responsibilities for non VAT registered businesses?
    I have found lots of info regarding being VAT registered, but no info on how to operate as a non VAT registered business.
    For example as a non VAT registered business do I still need to pay VAT to HMRC?
    On my receipts to customers should i show VAT or not?
    Thanks in advance for your reply.
    Marc

    • Hi Marc,

      If you are not VAT registered, you cannot charge for VAT or display it anywhere, and there is no need to pay VAT to HMRC because you are not receiving any from your customers.

      The only time you may encounter VAT is when you are actually buying something – the businesses you are purchasing goods or services from may charge VAT. However, you will not be able to reclaim this VAT if you are not VAT registered.

      I hope this makes things a bit clearer – VAT is very confusing!

      Best wishes,

      Rachel

  8. Dear Rachel,

    what about receiving goods in the UK from the EU worth LESS than £83,000 per year?

    Companies from other European countries say that they need my VAT registration number, to claim reverse charge.

    Or is there another number I can give them for this, like my UTR?

    Best,

    Marcus

    • Hi Marcus,

      Your UTR will not be useful to them – this is a confidential number and should only be disclosed to HMRC and Companies House.

      If you are not VAT registered and receive goods from other countries in the EU, your supplier will charge VAT at the local rate in the EU country from which the goods are supplied. However, if you do register for VAT, your supplier will not add it to your invoice because they can reclaim it. You can read more about his here: https://www.gov.uk/guidance/vat-imports-acquisitions-and-purchases-from-abroad

      I would advice speaking to HMRC or an accountant if you are unsure what to do next.

      Best wishes,

      Rachel

  9. IF HMRC rejects the application, where are these additional documents required to be submitted? The response simply states that the requisite information needs to be provided to HMRC but where this information is to be submitted is not known.

    Can let me know at what address of HMRC do we need to submit these additional documents?

    Gaurav Sehgal

    • Hi Gaurav,

      If a VAT Registration has been processed online you can upload the information in PDF format to your application. The system will ask for it specifically.

      If you made the application in paper format, you would need to post the ID to the following address:

      HMRC
      Vat Registration Team
      Crown House
      Birch Street
      Wolverhampton
      WV1 4JX



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