If you run a business, you might be unsure whether it’s worth voluntarily registering for VAT and taking on the extra accounting responsibilities.
VAT is a very complex aspect to the UK tax regime that can put quite a large burden onto businesses that charge VAT on their goods and services, only to pay that money back to HMRC in tax returns.
The current standard VAT rate is 20%, which applies to most goods and services. The reduced rate is 5%, while zero-rated goods are not taxed.
What are the advantages behind joining such a tax scheme in which you essentially collect tax on behalf of HMRC? In this blog, we go over everything you need to know.
When businesses have to register for VAT
You must register for VAT if your total VAT taxable turnover for the last 12 months was over £85,000, which is known as the VAT-registration threshold.
If you expect your turnover to go above the threshold in the next 30 days, you must also register for VAT. Your effective date of registration is the date you realised you had to sign up, not the date your turnover went over the threshold.
Your turnover is the total value of everything that is not exempt from VAT. It also includes zero-rated goods, goods you hired or loaned to customers and business goods used for personal reasons.
You must also register for VAT (regardless of VAT taxable turnover) if all the following are true:
- you’re based outside the UK
- your business is based outside the UK
- you supply any goods or services to the UK (or expect to in the next 30 days).
Benefits of registering for VAT
While it’s valuable to know when you must register for VAT, you came here to find out whether it’s worth doing it voluntarily. So, how can smaller businesses benefit from being VAT registered?
First, you’ll get a VAT registration number. That might not sound very important, but it’s an essential identifier to include as part of your paperwork, invoices and so on.
A lot of people know that there is a VAT threshold and bigger businesses are usually the ones that have to deal with it, so being registered and showing this through a registration number can sometimes make your business appear larger than it actually is.
This may also help you when it comes to dealing with other businesses, as some prefer it if you can raise a valid VAT invoice.
Another benefit comes from the fact that you can reclaim VAT from goods you still hold for the past four years, and services you rendered within the last six months. This would require you being in business for this length of time and having kept VAT invoices and records for the period.
You can also claim VAT refunds on certain goods and services your business buys once registered. This must be balanced with what your business is charging and receiving in VAT from sales made to your customers over the year. – but it means if you’re buying standard or reduced-rate products but selling zero-rated ones, you might find HMRC is sending you some money for a change!
There’s a wide range of goods and services that are zero-rated for VAT, ranging from new-build housing and utilities to children’s clothes, books and certain types of food, so it’s worth checking this no matter the sector you work in.
Another reason you might register early is to avoid the VAT ‘cliff-edge’ in costs. This is mainly relevant if you sell directly to consumers – that is, people who aren’t VAT-registered and so can’t reclaim any VAT – as going over the threshold means you either have to raise your prices or absorb the extra cost.
Voluntarily registering means you can build in the cost of VAT from the start instead.
Need help with your VAT return?
Once you’re registered for VAT, you need to file a digital VAT return every quarter or month according to Making Tax Digital rules.
If you’re not sure about what you will have to do to stay compliant with your new responsibilities or which VAT scheme will suit you best, don’t hesitate to reach out to us for help.
We can help guide you through the VAT registration process, too.
As accountants for VAT, we can help your business with everything tax related.