Guide to Voluntary VAT Registration: Definition with Pros and Cons

Tax is one of the main finance and accounting considerations for both new and existing business owners in the UK. Among other taxes, VAT is a prominent category that applies to all business entities with a turnover of more than £85,000 a year. However, you can also opt for voluntary registration for VAT even if you are in a lesser turnover bracket.

In this article, we will provide business owners with an insightful overview of VAT and voluntary VAT registration and describe the advantages and disadvantages of going VAT registered. 

What Is VAT?

VAT is an abbreviation of Value Added Tax, which is charged on most goods and services sold in the United Kingdom. What does being VAT registered mean? It means that your business is registered with the tax authorities for this consumption tax. 

What Is the VAT Registration Threshold?

The VAT Registration Threshold is the turnover limit that makes a company legally liable to register for VAT in the UK. Currently, the VAT registration threshold is set at a turnover limit of £85,000 for any business money flowed to in the previous year.

For companies with a taxable turnover of less than this amount, it is not mandatory to charge VAT on their products and services. They may still voluntarily opt to register for the VAT due to the advantages this can bring.

Who Can Register for VAT?

VAT voluntary registration is open to different types of businesses, including:

• Public Limited Companies (PLCs)
• Private Companies Limited by Shares or Guarantee (LTD)
• Limited Liability Partnerships (LLPs)
• Corporate Groups and Business Divisions
• Unlimited Companies
• Limited Partnerships (LPs)
• General Business Partnerships
• Sole Proprietors and Traders
• Charities and Non-Profits, Including Clubs and Associations.

Registering for VAT is not restricted based on the company's legal structure. It only relates to the previous 12 months’ turnover and the category of goods and services being sold.

VAT is not applicable to certain exempt items like baby clothing and infant food products. If all the products you sell are exempt from VAT, you cannot register for it as a company.

Advantages of Voluntary VAT Registration

Is it worth being a VAT-registered business? What are the benefits of VAT registration? Read on to find out!

1. It Allows You to Reclaim VAT

Being a VAT-registered business in the UK gives a company the leverage to reclaim the VAT that it may have spent on goods or services sold by other VAT-registered businesses. This can bring down your business expenses and improve profitability.

2. It Improves Your Company’s Image

VAT voluntary registration enhances company credibility, trust, and professionalism among potential customers and other industry players. It helps boost your brand image in the market, helps portray your company as a trustworthy VAT-registered business, and improves investor confidence. Besides, it’s the signal that your annual turnover is equal to or above the VAT threshold, which is a positive indicator for new business relationships.

3. It Enhances Your Chances of Getting More Business

One of the benefits of being a VAT-registered company is that you will be a preferred partner of other VAT-registered companies because of the VAT reclaiming feature provided in the UK. This helps boost your demand as a potential business or trade supplier.

4. It Simplifies Bookkeeping 

VAT registration allows your company to employ the simple and straightforward bookkeeping practices of a cash accounting scheme. You record only the total value of each invoice without deducting the VAT amount. So, your company will only file quarterly returns for VAT.

Potential Cons of Voluntary VAT Registration 

Here are some disadvantages you can encounter:

1. Increased Chances of an Audit

What is a VAT-registered company if not a business operating under the strict surveillance of the tax authorities? The Inland Revenue will likely seek a deeper insight into your business operations to ensure that every aspect is legally in order. Their prime focus will be on lawful charging and remittance of VAT. Although this does not pose a threat if you have things in order, an audit is time-consuming and can also be financially costly for your company.

2. Forgo Your Competitive Advantage

VAT-registered companies add VAT to the price they charge customers for their goods and services. In the UK, this rate is 20%. In essence, this is an additional cost to the customer and will likely repel potential clients who make their buying decisions based on price.

If your competitors are non-VAT registered, the voluntary VAT registration will automatically increase your prices and cause you to lose a competitive advantage.

3. You’ll Be Subject to Complex Business Regulations and Administration

Voluntary VAT registration requires additional paperwork, administration, and accounting requirements to be set before the process begins. Consequently, you invest time, energy, and resources in managing the VAT registration process.

4. You May Pay More If Your Sales Drop

When a company registers for VAT voluntarily, it must make quarterly VAT payments to HMRC, calculated on the previous quarter’s sales. As a result, if you have a low turnover after VAT registration, the company might end up owing more money to the authority than it is making.

How to Register for VAT in the UK

There are no special rules for registering for VAT in the UK. We present three simple steps of how it can be done:

Step 1: Check Your Company’s Eligibility to Register for VAT

Any company operating in the UK dealing in taxable goods and services is eligible to register for VAT. However, some items are exempted from VAT. You can check the list for more information. 

Step 2: Select the Appropriate VAT Scheme

The UK Tax Authority offers various VAT schemes to companies. As a business owner, you should choose the scheme that best suits your needs.

The Standard VAT Scheme is the most widely opted for in the UK. It is appropriate for companies with simple VAT affairs. There are other VAT schemes as well, like the Flat Rate, Cash Accounting, and Annual Accounting.

Step 3: Go for VAT Registration

Businesses in the UK can register for VAT online through the official website. You will be required to submit your contact information, bank details, and National Insurance number. In some cases, a company registration number may also be required.

How to Calculate the Turnover for Voluntary VAT

The total turnover is equal to the value of all the products or services you sell.

Total Turnover = Total Goods Sold to Customer

This should not include any items that are exempt from tax. It also includes:

•  Zero-Rated Goods
• Hired or Loaned Goods
• Goods Employed for Personal Use
• Bartered, Exchanged, or Gifted Goods
• Services Rendered by Companies Outside of the UK
• Fixed Asset/Building Works for Companies.

Consider The Hoxton Mix Your Trusted Partner

If you want to opt for voluntary VAT registration in the UK, you are required to provide a physical address for your existing office. In many cases, companies consider using a virtual office address for VAT registration. 

The Hoxton Mix offers its clients dedicated desks designed to meet your business address needs. You will get high-speed fibre-optic broadband, complimentary refreshments, an ergonomic chair, and meeting room usage to get the most out of your subscription. Also, learn more about how to register a company in the UK on our website or contact our team, who will answer all your questions

FAQ

Can I cancel my VAT registration if I change my mind?

Yes. You can cancel your VAT registration through your online VAT account. You can also de-register by sending an email to the VAT authorities. 

Who needs to register for VAT?

A company whose VAT taxable turnover is equal to or more than the VAT registration threshold in a consecutive 12-month period must register for VAT. 

What are the pros and cons of voluntary VAT registration?

There are many benefits and drawbacks of voluntary VAT registration. Some of the advantages include improving companies image, simplifying the bookkeeping process, and saving some money on sold services. The main disadvantages are more paperwork and a thorough audit of your company by the government.   

How do I register for VAT in the UK?

The registration process for VAT in the UK is straightforward. It can be completed in three easy steps: 1) Check if your services are eligible for VAT, 2) Choose the appropriate VAT scheme, and 3) Register online on the official website.

How do I calculate my turnover for voluntary VAT?

To calculate your turnover for voluntary VAT, you need to calculate the total amount of goods sold to customers.