Should I be VAT registered?

VAT registration

I am often asked what the advantages and disadvantages are of voluntarily registering for VAT.

Whether you are a sole trader, partnership or limited company, you can voluntarily register for VAT as long as you make relevant taxable sales and have an income which is less than the VAT threshold (currently £85,000).

The only exception is if your business makes exempt sales, for example providing insurance services, then you can’t register for VAT.

Advantages of voluntarily registering for VAT

There are a number of advantages of being VAT registered. These include:

  • You can claim back the VAT on your purchases. This can be backdated for up to 4 years from the date of registration, which can help with your current cash flow.
  • If you sell zero-rated items, such as books or food and buy standard-rated items you will receive a VAT refund from HMRC. There are 18 groups of zero-rated sales, so check to see if your business qualifies.
  • If you have a couple of months where you don’t sell anything but you are still buying goods and services for your business you will be able to claim a VAT refund from HMRC.

Disadvantages of voluntarily registering for VAT

If you don’t have to register for VAT, then it’s worth carefully thinking about the disadvantages, as sometimes they can outweigh the benefits:

  • As soon as you are registered for VAT you have to charge VAT on all of your relevant taxable sales regardless of whether your customer is VAT registered or not. This means your prices will immediately go up by 20% which could see you lose customers to non-VAT registered competitors.
  • You need to have the time and discipline to submit a quarterly VAT return to HMRC.
  • You need to keep good records. You may find it easier to use a bookkeeping package to ensure that all the transactions are accounted for correctly before submitting your VAT returns.
  • You have to ensure that you keep any VAT owed to HMRC available to meet the payment liabilities.
  • Claiming VAT on purchases is quite complicated and a fairly in depth knowledge of the VAT rules is required.

Running a business is already a full time job, so if you are thinking of voluntarily registering for VAT, and would like some further advice or help managing your bookkeeping and VAT returns, do get in touch.

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