Our accountants are often asked, “Should I register for VAT?”.
Regularly, when our accountants advise small businesses in St Albans, the answer isn’t a straightforward 'apply' or 'don’t apply.' The answer can typically be different for B2B (business to business) and B2C (business to consumer) companies.
Here we take a look at the different factors small businesses should consider when making this decision.
VAT: To Register or not to Register?
Registering for VAT is voluntary if your turnover is below the registration threshold and compulsory above it. Many traders are faced with a commercial decision as to whether to register before it becomes a requirement or whether to stay under the threshold and avoid it altogether. There are pros and cons to VAT registration depending on factors such as; your type of trading activity, your customer base and your future plans.When does VAT registration become compulsory?
There is a legal obligation to register for VAT if:
- The total value of everything sold (that is not VAT exempt) in the last 12 months was over £85,000. This is known as the VAT threshold, and / or
- It is expected the VAT threshold will be reached in the next 30 days
Registration imposes obligations on the business such as charging VAT, paying VAT and, of course, the associated record-keeping. UK Budget 2024 announced an increase to the VAT threshold.
The basic deregistration rules apply when:
- Expected VAT turnover is expected to be below the deregistration threshold or
- The business ceases to have a VAT turnover, in which case there is a requirement to notify HMRC within 30 days
The deregistration threshold also increases from 1 April 2024.
What are the threshold changes from the Budget?
The registration and de-registration thresholds have been increased from 1 April 2024:
- The VAT threshold increases from £85,000 to £90,000 (in Northern Ireland, this applies to EU acquisitions between £85,000 and £90,000). As the Budget report suggests, this may incentivise SMEs who may have chosen not to grow their business for fear of reaching the threshold
- The VAT deregistration threshold increases from £83,000 to £88,000
Threshold changes in summary:
| Circumstance | New Threshold | Action |
|---|---|---|
| Total taxable turnover | More than £90,000 | Register for VAT |
| Bringing goods into Northern Ireland from the EU (‘acquisitions’) | More than £90,000 | Register for VAT |
| Selling goods from Northern Ireland to consumers in the EU (‘distance selling’) | Total sales across the EU over £8,818 | Register for VAT in EU countries |
| VAT registered - taxable turnover | 2% | Nil |
Do note that there are other rules on reporting VAT if you sell goods from Northern Ireland to VAT-registered businesses in the EU.
HMRC’s Policy Paper says the increases are not expected to have HMRC VAT process or VAT administration obligations. VAT is still a taxation regime, so, HMRC’s processes and administration will not change. But the Policy Paper suggests the impact on business will be ‘significant’.
It is interesting that there remains a difference between the requirement to register and the circumstances that allow a business to deregister:
- For registration, one requirement is that the VAT threshold was exceeded in the last 12 months
- For deregistration, there is no provision to deregister based on turnover not exceeding the VAT threshold in the last 12 months
Why would I register voluntarily?
In the realm of taxation in the United Kingdom, the decision to voluntarily register for Value Added Tax (VAT) is a pivotal one for businesses. With its complexities and implications, understanding the pros and cons of voluntary VAT registration is crucial for small businesses and start-ups. Here, we delve into the intricacies of this decision to help provide some much needed clarity and guidance.
What are the Pros of Voluntary VAT Registration:
1. Enhanced Business Image: Voluntarily registering for VAT can confer a sense of legitimacy, scale and professionalism to your business. It can signal to customers, suppliers, and other stakeholders that your business has reached a certain level of turnover and permanence; boosting credibility in the marketplace.
2. Reclaiming Input VAT: One of the primary advantages of VAT registration is the ability to reclaim VAT paid on business expenses. This includes purchases of goods and services necessary for business operations. For businesses with significant input VAT, this can result in substantial cost savings. You should consider your level of VAT-able purchases before deciding whether this is a worthwhile factor as not all expenses have reclaimable VAT.
3. Competitive Advantage: VAT registration can open doors to new opportunities, particularly in dealings with larger companies or government contracts. Many organisations prefer to work with VAT-registered suppliers, considering it a mark of stability, reliability and reduced risk.
4. International Trade Facilitation: VAT registration can be advantageous for businesses engaged in international trade. It simplifies customs procedures and facilitates smoother transactions, as many countries require VAT registration for import/export activities.
5. Potential for Growth: Voluntarily registering for VAT can position your business for future growth. It prepares you for expansion, ensuring compliance with tax regulations as your turnover increases. It reduces the risk of shock to your customers when becoming VAT registered as your prices would increase by 20%. This won't matter if your customer base is mainly VAT registered because they can reclaim it but if they are mainly consumers then they won't be able to reclaim the VAT.
What are the Cons of Voluntary VAT Registration:
1. Financial Burden: VAT registration brings with it additional administrative responsibilities and potential costs. From record-keeping to filing VAT returns, compliance can be time-consuming and may require investment in accounting software or professional services.
2. Cash Flow Impact: VAT-registered businesses must collect VAT on sales and pay VAT on purchases, leading to potential cash flow challenges. Until VAT payments are offset by reclaims, this can strain liquidity, especially for businesses with tight margins or irregular income. Businesses should consider their supplier vs customer payments terms in the light of their VAT reporting cycle.
3. Price Sensitivity: In some industries, especially those with price-sensitive consumers, adding VAT to the price of goods or services can make them less competitive. If your trade is B2C then your customer base will be individuals that aren't registerd for VAT; so any VAT will be an additional cost to them that can't be reclaimed. This may result in reduced sales volume or necessitate absorbing VAT costs, impacting margins and profitability.
4. Complexity and Risk of Errors: VAT regulations are intricate and subject to frequent changes, posing a challenge for businesses to ensure compliance. Mistakes in VAT calculations or reporting can lead to penalties and fines, increasing the risk of financial loss and reputational damage.
5. Threshold Considerations: Businesses must carefully evaluate whether their turnover justifies voluntary VAT registration. Crossing the VAT registration threshold triggers mandatory registration, but voluntary registration below this threshold requires careful consideration of the associated benefits and costs. It may be that you don't intend to grow your business above the VAT threshold in which case voluntary registration should be a very carefully considered decision.
6. Mixed supplies: Businesses that have a mix of VAT-able and exempt supplies fall under a regime called 'partial exemption' for VAT. This can considerably restrict the amount of input VAT you can reclaim and as a result VAT registration can actually add considerable costs to these types of businesses.
What VAT schemes are available to me?
There are various VAT schemes available to businesses that can help mitigate some of the negative factors above or align the process better with your type of business.
VAT Flat Rate Scheme: The VAT Flat Rate Scheme lets you work out what you owe HMRC in VAT as a percentage of your gross turnover. You can only use this scheme if you’re a small business with an annual taxable turnover of £150,000 or less excluding VAT. The amount of VAT you pay depends on your industry and type of business.
VAT Annual Accounting Scheme: If your annual VAT taxable turnover is £1.35 million or less, you may be eligible for this scheme. Complete one VAT return each year instead of four.
VAT Cash Accounting Scheme: If your annual VAT taxable turnover is £1.35 million or less, you may be eligible for this scheme. Pay VAT to HMRC when your customer pays you, rather than when you invoice them.
VAT Margin Scheme: If you are a retail business or sell second-hand goods, you may be able to use this scheme. Pay VAT on the value you add to the goods you sell, rather than on the full selling price of each item.
VAT Retail Schemes: If you are a retail business or sell second-hand goods, you may be able to use one these three schemes. Calculate the VAT once with each VAT return, rather than calculating it for each sale you make.
In conclusion...
For start-ups, small businesses, sole-traders and the self-employed, the decision to voluntarily register for VAT in the UK demands thoughtful analysis of the potential benefits and drawbacks. While VAT registration can confer advantages such as enhanced credibility, cost savings, and access to new opportunities, it also entails financial burdens, compliance complexities, and cash flow considerations.
Accountancy firms, such as Visionary Accountants, play a crucial role in guiding their clients through this decision-making process, providing expertise in tax planning, compliance, and risk management. By assessing each client's unique circumstances and objectives, we can help businesses navigate the complexities of VAT registration and optimise their tax strategies.
Ultimately, the decision to voluntarily register for VAT should align with the broader goals and growth plans of the business, taking into account its financial capabilities, industry dynamics, and competitive landscape. With informed guidance from their professional advisers businesses can make sound decisions that position them for success in the evolving landscape of UK taxation.
Take VAT advice from a local accountant
If you own a small business and you are nearing the VAT registration threshold, or you believe you will benefit from registration, speak to your local accountant. Specifically, if you have a B2C-centric business, the VAT registration decision can be pivotal.
Our team of qualified accountants in St Albans are here to help. Speak to Chris or James, call 01727 730550.