VAT registration, whether compulsory or voluntary, can provide a range of benefits to businesses of all sizes. However, there are also certain downsides to be aware of. Below, we outline the criteria for compulsory VAT registration and discuss the pros and cons of registering a business for Value Added Tax.
When is VAT registration compulsory?
VAT registration in the UK is compulsory for all types of businesses, including limited companies and sole traders, when any of the following criteria are met:
- VAT-taxable turnover is more than £85,000 (2021/22 registration threshold) within a 12-month period
- VAT-taxable turnover is expected to exceed £85,000 within the next 30 days
- the business buys more than £85,000-worth of goods from EU VAT-registered suppliers
- the business is outside the UK but supplies goods or services to the UK
Voluntary VAT registration is also available when there is no legal requirement to register. This is worth considering because it offers significant financial and professional benefits to new and small businesses.
Please note: ‘Taxable turnover’ is the amount of money your business makes from selling products and services. This differs from ‘taxable profit’, which is the surplus income that’s left after you’ve deducted business costs and expenses from overall income.
If your business is based in the EU and you distance sell goods that are located in an EU member state to non-VAT registered customers in the UK or Isle of Man, you must register for VAT when:
- the value of these distance sales exceeds £70,000 in a calendar year, or
- you distance sell excise goods (e.g. alcohol and tobacco) of any value into the UK
Non-VAT registered customers include:
- private individuals
- certain small businesses
- businesses that are unable to register for VAT because their activities are exempt
- public bodies
Please note: distance selling only applies to goods, rather than services.
Sales made to VAT-registered customers do not count as distance sales. Furthermore, if your business is outside the EU, any sales of goods from within a non-EU member state to customers in the UK are not classed as distance sales.
There are also different VAT rules and responsibilities for businesses selling goods in the UK using online marketplaces.
Pros and cons of VAT registration
Pros of VAT registration
- You can charge VAT on the goods and services you sell. This is known as ‘output tax’.
- You can reclaim VAT you’ve paid on goods and services bought from other businesses. This is known as ‘input tax’.
- Your business will be eligible for VAT refunds if you 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 give you a competitive advantage, especially if you’re dealing with other VAT-registered businesses and clients.
- Displaying a VAT number on stationery and websites may encourage larger firms to consider doing business with your company. Many big firms, particularly those in the finance sector, refuse to work with non-VAT registered businesses.
- You can produce VAT invoices to your clients/customers.
- When you register for VAT, you can make claims for legitimate goods purchases for up to 4 years before registration and services up to 6 months. If you’re registering for Voluntary VAT registration means that you can backdate your registration and reclaim VAT on legitimate business purchases by up to 4 years (for goods) or 6 months (for services).
Cons of VAT registration
Charging VAT on certain products and services may deter potential clients and existing customers who are not VAT registered because they won’t be able to reclaim the VAT.
- If output tax exceeds input tax, you will need to pay the difference to HMRC.
- VAT registration is accompanied by extra administration and paperwork. You will have to maintain accurate VAT accounting records and submit quarterly VAT returns to HMRC.
To determine whether voluntary VAT registration is right for your business, it’s important to weigh up the pros and cons in relation to the goods and services you buy and sell, who and where your customers are, and the type of industry you’re operating in. More often than not, the potential benefits far surpass the extra admin, but it may be worth speaking to an accountant for professional, tailored advice before making any decision.
How do I reclaim VAT?
VAT can usually be reclaimed on any goods and services that are bought for business use, even on purchases made before the date of VAT registration.
However, VAT on any goods and services 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, computers and 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 your 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?
You must cancel your VAT registration if your business is no longer eligible to be registered. For example, if you cease trading, stop making VAT-taxable supplies, or join a VAT group. You also have the option to cancel your VAT registration at any time if your VAT-taxable turnover falls below £83,000 (2021/22 de-registration threshold) or if you no longer wish to continue with voluntary registration for any reason.
To cancel VAT registration, you must contact HMRC online or by post (using form VAT7) within 30 days of the date your business stops being eligible. You will need to state the reason for de-registration and the date from which your VAT registration should stop. Until this date, you must continue to charge and account for VAT.
Within approximately 3 weeks of submitting the application, HMRC will contact you to confirm the official date of de-registration. You will then be required to submit a final VAT return. You must also keep all VAT records for 6 years from the de-registration date.
Optional VAT Flat Rate Scheme
Normally, the VAT that businesses pay or reclaim is based on the difference between the VAT charged on sales (output tax) and the VAT paid on purchases (input tax).
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 instead. This means that you can keep the monetary difference between output and input tax, but you can only reclaim VAT on purchases of capital assets over £2,000.
To be eligible to join this scheme, your 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.