Should I register my business for voluntary VAT?

There are certain benefits for businesses being registered for VAT. This is why some businesses consider registering voluntarily. But is it the right decision for your business? Let’s consider the pros and cons of voluntary VAT registration.

But first some technical details. The current threshold for having to register for VAT with HMRC is £85,000 (tax year 2018/19). Even though this may seem like a good size income for a small business, you have to consider that this figure refers to your taxable turnover. This is the income generated from all your sales. The threshold does not consider how much profit you made on that amount of sales.

Advantages of voluntary VAT registration

1. For a small business, one of the main advantages is that the business can seem bigger than it actually is. It can be difficult when you first start out as a small business to compete against bigger companies. Being able to charge VAT may suggest that your business’ turnover is over the threshold and successful. This opens up a wider circle of suppliers and potential customers for your small business.
2. Every registered business receives a VAT registration number. You should display this number on all your invoices. Displaying a VAT registration number, instils more confidence in your business and gives you an air of professionalism.
3. If your business is near the turnover threshold, you have to keep a constant eye on your income, so you don’t overlook when your turnover goes over the threshold. HMRC will definitely notice and if you fail to register within the allotted time frame you may have to pay penalties. Voluntarily registering will prevent this. Once you’re registered and your turnover then exceeds the threshold, it’s business as usual.
4. Once you are VAT registered, you not only charge VAT on your products or services (output tax) you can also claim back VAT on goods and services purchased for your business (input tax). Especially at the beginning of your business, chances are high that your input tax exceeds your output tax which means you receive money back from HMRC in tax refunds. And should you sell products or services that are either zero rated or are taxed at the reduced rate, you could keep getting tax refund for a while.
5. You may reclaim VAT from the last 4 years. This means if you’ve been in business for a little while but haven’t reached the threshold yet, you may be able to reclaim VAT as long as you have kept proper VAT records and past invoices.

Disadvantages of voluntary VAT registration

1. Your prices will increase by up to 20% (standard rate VAT) which could make you less competitive in the eyes of small businesses who are not VAT registered themselves and can therefore not reclaim the tax. It’s simply extra cost for them.
2. There will be an increase in paperwork and related admin. VAT registered businesses must maintain VAT accounting records, raise VAT invoices, keep all VAT related invoices and receipts, and file VAT returns every quarter. You may have to upgrade your accounting methods to do this, especially when Making Tax Digital comes into force in 2019. And should you fall behind with the filing of your VAT returns, there are penalties and fines.
3. You must be more aware of your cashflow situation, especially if your output tax exceeds your input tax and a tax payment is due to HMRC as a result.

And what if you register voluntarily but decide that the disadvantages outweigh the advantages in your particular case? Or maybe your situation changes.

Can you deregister?

The answer is, yes, if your turnover will not exceed the deregistration threshold which is currently £83,000 (tax year 2018/19).

There are certain conditions under which you must deregister. These are if you stop trading, become part of a group, or sell your business. In the last case, the new owner may choose to keep the registration number.

It is a big decision for any business to register for VAT voluntarily. Don’t take this decision lightly; you should definitely get expert advice before doing so.

Here at Alba we can advise and give you all the facts you need to know before registering for VAT on a voluntary basis. We can then also help with the day to day administration and record keeping of your VAT accounts. If you have any questions on this topic, please do not hesitate to contact us. You can either email us at admin@alba.uk.com or phone us at 01509 853779.

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