In this article, we will cover the pros and downsides of voluntary VAT registration, as well as the advantages and disadvantages of pursuing this course of action. Businesses of all sizes can benefit from VAT registration, for example, but there is a significant amount of administrative work involved in obtaining this status.
If you are considering voluntarily registering for VAT, it is critical that you understand the various advantages and disadvantages, as well as the potential impact on your business, which we will go over in detail below.
What exactly is VAT?
Tax on goods and services delivered by VAT-registered firms that add value is referred to as Value-Added Tax (VAT) in the United Kingdom (VAT). It also applies to goods and services imported into the UK from nations both inside and outside of the EU, including the United States.
Businesses that are registered for VAT include VAT in the price of the goods and services they sell to both commercial and non-commercial customers alike. In most cases, these businesses can also claim the VAT they have paid on the goods and services they have purchased.
Businesses that are not registered for VAT are unable to claim any of the VAT that they have paid. You must be registered for VAT in order to be able to charge or claim this tax on any goods or services you purchase or sell.
When taxable turnover (i.e., total takings minus profit) for the previous 12 months exceeds the VAT registration threshold of £85,000 (2020/21 tax year), or if it is expected to exceed that threshold in the next 30 days, a business is legally required to register for VAT.
What is the meaning of voluntary registration?
In the vast majority of cases, small firms with a turnover below the VAT registration threshold prefer to register for VAT on a voluntary basis before they are forced to do so by law. They make this decision for a variety of business reasons, which we will discuss further below.
The benefits of registering for VAT on a voluntary basis
There are numerous advantages to registering for VAT, whether voluntarily or compelled.
Almost all goods and services purchased from other businesses are eligible for VAT reimbursement.
The VAT paid by your customers will be able to be reclaimed by HMRC if they are VAT registered office. It is still possible for you to keep your prices competitive while recovering the VAT on your expenses.
The look of larger and more established firms can be created by small businesses. Due to the assumption that the company's turnover exceeds the VAT registration threshold, consumers, lenders, investors, and suppliers may find this to be highly enticing.
Businesses that are VAT-registered are assigned a VAT number to identify themselves. This information can be presented on bills, letterheads, websites, and other types of business stationery, among other locations. It is again possible that this will be attractive to other businesses, many of which may be unwilling to do business with a non-VAT registered entity because it is deemed to be too small by them.
Provided that HMRC is provided with sufficient evidence, voluntary registration can be backdated by up to four years. A business may be able to reclaim VAT paid on equipment that is still in use if it follows these guidelines.
Having your business registered for VAT will force you to keep more accurate records, which will ultimately benefit the operation of your company.
