Registering for VAT sounds like a business headache, conjuring up images of complex and unending paperwork. In this article, we will look at all the pros and cons associated with being VAT registered.
While it is not as complicated as you might imagine, you do need to approach registering for VAT with an understanding of the advantages and disadvantages. As with everything in life, there will always be more than one perspective on the impact of VAT registration on your business. Knowing whether it’s right for you will be revealed as you read on through the article.
If you originally registered your company using a company formation agent, such as Uniwide Formations, we can register for VAT on your behalf. Errors completing a VAT1 form are commonplace but with our professional expertise, we can help you avoid this.
Why would I register my business for VAT?
If your business has an annual taxable turnover of £85,000 (2021–2022), or if you anticipate that you will have a taxable turnover over that sum in the next 30 days, it is compulsory that you register for VAT.
If your business has a turnover of less than £85,000 you are under no legal obligation to register for VAT. However, you may determine that it is advantageous to register, for financial reasons and for the benefit of your businesses’ reputation. Here we will guide you through the pros and cons of registering for VAT, enabling you to decide whether it is the right option for your business.
Will I lose money if I register for VAT?
Registering for VAT will not cost you money. By registering for VAT you are essentially collecting tax for HMRC by charging VAT on the goods, products and services that you sell. This is known as Input Tax. In turn, you are charged VAT on the business purchases and expenses you incur as a business owner. This is called Output Tax. If you pay more in Input Tax than you collect in Output Tax, you are entitled to reclaim the difference from HMRC.
Registering for VAT could ultimately generate a small profit. If you apply for the Flat-Rate Scheme, you may be allowed to retain a small amount of the VAT you collect. This extra revenue could make a big difference to your business in both the long and short term.
How much VAT will I have to charge my customers?
The amount of VAT you charge your consumer will be dependent on the type of business you run. The majority of businesses will apply a standard 20% rate, this is known as the Flat-Rate Charge.
There are two other VAT rates; reduced rate (5%) and Zero rate (O%). The rate relevant to you will depend on the products you sell or the services you offer, not on your personal preference. You can read more about the rates here.
What are the advantages of registering my business for VAT?
There are considerable benefits to be had should you opt to register your company for VAT. All businesses continually strive to maintain and increase their professional standing within the business community and applying for VAT early can help with this. By being VAT registered when your turnover is less than the legal ceiling, you are demonstrating that you are serious about money and can handle it responsibly.
In addition, a VAT number gives you the chance to improve your profits by making use of the VAT schemes mentioned above.
Improve your image
One of the standout benefits relates to the way others view your business. Once you have registered for VAT, even if you are turning over considerably lower than the £85,000 threshold, other businesses could be given the impression you are meeting that ceiling. This can promote a sense of stability and credibility around your company. Suppliers, investors and clients may view this status with a perception of reliability, enhancing your overall image. It can also be a powerful marketing tool. There are businesses, especially overseas businesses, that are reluctant to deal with companies that are not VAT registered. So, registering for VAT can enable you to strike out and facilitate an international presence, broadening your scope when sourcing supplies and products.
It is not just the big companies that are comforted by VAT registered businesses. Smaller organisations often feel more secure when dealing with companies that are VAT registered.
You receive a VAT number
Once you have registered for VAT, you will be given a VAT number. This number can be displayed on company stationery, letter headings, your website, documents and invoices. This adds another layer of professionalism to your company, making you appear more trustworthy and reliable. All of which adds credibility to your name and reputation.
You can claim VAT refunds
Once you have received your VAT number, you can claim back VAT on any expenses accrued or services used throughout the course of your business. The VAT on large purchases, such as equipment or machinery, even IT you have invested in, could potentially be claimed back. Of course, you will need to balance what you have charged in Input payments throughout the course of the year.
You can claim back VAT retrospectively
By registering for VAT, there is the possibility that you can claim backdated VAT. You are entitled to claim VAT from up to four years previous on equipment or expenses you have incurred. To do this, you would need evidence of the purchases you have made. But, it could generate the extra income needed for investment or provide you with some extra cash flow.
What are the disadvantages of registering my business for VAT?
There can be disadvantages to registering for VAT and they must be weighed up against the advantages if you are in a position to choose whether registration is a profitable outcome for you.
You are essentially adding 20% to the cost of your goods and services when you apply VAT. Customers could therefore perceive you as expensive in relation to others who are offering the same goods or services as you, but who aren’t VAT registered. This could impact profitability. It would be worth checking the market to determine how an increase in the cost to the consumer will affect your ability to compete. Some of your customers or clients may not be VAT registered, this means that they are unable to claim back VAT on purchases, expenses or fees for consultancy. If you charge them VAT and they can’t recoup that, they may look for someone providing the same goods or service without VAT to save them 20% on the outlay.
The key is to know your market and your client base. A formations company, such as Uniwide Formations, can provide you with the expertise and knowledge to make these important decisions.
Increase in administration
Once you have a VAT number you will be required to complete quarterly or monthly returns to HMRC. If you retain the services of an accountant to complete your returns, you could see your accountancy fees rise. If you are completing the returns yourself, you are going to feel the administrative burden that this entails.
Also, keep in mind that HMRC will expect evidence to be kept and this increases the paperwork that will need to be managed and organised. Although the image of an overstuffed filing cabinet does not need to become reality as there is a gamut of software programmes out there to help you.
Possible VAT bills
If your Output Tax (the VAT you spend on services and products needed to run your business) is greater than your Input Tax (the VAT you charge customers for the services or products you offer), you will need to pay HMRC the difference. Depending on the size of this difference, you could find yourself with a potentially hefty and unwelcome bill at the end of the year. The result of this could be damaging to your business, leading to cash flow problems in the short term.
When should I register for VAT?
If you know that projected forecasts imply you will reach the ceiling imminently, it is worth registering as soon as possible. Once you hit the ceiling, it is a legal requirement to register within 30 days. HMRC is pre-emptive at checking whether a business should be VAT registered. If you are found not to be in receipt of a VAT number when you should have one, there are large penalties handed out.
If predictions do not indicate you are going to reach the £85,000 turnover in the near future, the decision to register has to be balanced. If the advantages outweigh the disadvantages, then it is worth considering. By consulting with our agents at Uniwide, you can rely on our industry-wide expertise to help make the best decision for you and your company.
How do I register for VAT?
You can visit HMRC website and complete the online application. Or you can download the VAT1 form and return it by post. Do be aware that failure to complete the form accurately can delay successful VAT registration significantly.
Alternatively, if you are a company that is limited by shares (Ltd), we can complete the VAT registration service for you. Once you have filled in our VAT questionnaire, we will prepare and send your VAT1 form. Inconsistencies and discrepancies in these forms are common, so using a formations company such as Uniwide can help take away the stress and shorten the process. Once the application has been approved, we will email you the VAT Registration Number and HMRC will send you the certificate by post.