VAT registration is a requirement for businesses in the UK when their taxable income for the previous 12 months exceeds £85,000 (2020-21 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
- 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.
- When registering for vat you can make claims for legitimate goods purchases for up to 4 years before registration and services up to 6 months.
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.
AT 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.