Should your Business be VAT-Registered?

You may wonder why anyone would register for VAT if they don't have to by law. The answer is because the advantages will often outweigh the disadvantages, depending on your personal circumstances.

VAT never belongs to you. It's a tax collected on behalf of HMRC. A VAT-registered business adds VAT to its sales invoices and can reclaim the VAT in any items they have purchased. A business that isn't VAT-registered still has to pay the VAT on each purchase but isn't able to reclaim it.

The businesses that tend to suffer most are the non-VAT registered small businesses and individual traders at the bottom of the chain.

How many UK businesses are VAT-registered?

According to the Office for National Statistics, 2.6 million private sector businesses are VAT-registered or registered for PAYE. This equates to 45% of the estimated total private sector business population.

This means 3.2 million businesses, equating to 55%, trade without being registered for VAT or PAYE. They are classified as unregistered. Only 13% of sole proprietorships are registered for VAT.

The VAT rate in the UK has been 20% for most goods and services since January 2011. There are a few exceptions, such as children’s clothing and footwear, which have a zero rate for VAT.

What are the benefits of being VAT-registered?

You might think it's easier not to register for VAT if you’re not obliged to by law. After all, once you register, you must send regular VAT returns to HMRC. Business owners will always want to keep their paperwork to a minimum.

However, being VAT-registered can make your business seem bigger, more established and add an air of authority. Registering for VAT means your customers and competitors won’t know what your annual turnover is. If you haven't registered for VAT, you’re telling the world your annual turnover is below the VAT threshold.

In addition, if your customers are VAT-registered businesses, then the VAT they pay you for your goods or services can be reclaimed. This means they may not be too concerned about the VAT component when paying you, as they will be able to claim back some or all of it. Some prospective clients prefer dealing with a VAT-registered company, especially if they intend to spend a lot of money.

A common reason to register for VAT voluntarily is to recover the VAT that you incur in start-up costs. The owner of a new cafe might spend a lot of money on buying equipment, for example. You can recover the VAT element of these costs and return the cash flow to the business, rather than waiting until the turnover is greater than £85,000.

Are there any drawbacks?

Once you've registered for VAT, you need to submit VAT returns to HMRC four times a year. You will also need to account for the VAT on your taxable income.

Businesses who wish to become VAT-registered to reap the benefits might be concerned about the extra paperwork - the only drawback. For this reason, many choose to employ the services of a professional accountant to save time and make sure it's done properly.

Register for VAT on the government's Gov.uk website on its VAT registration pages. This is the procedure whether you're registering voluntarily or compulsorily because your annual turnover has reached the VAT threshold.

Further Reading: How to Run a Tax Efficient Business.