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Everything you need to know about VAT registration

March, 5 2024

As a business owner, VAT can seem quite daunting and confusing. Are you forced to register for VAT or can you do so by choice? When do you have to register for VAT?

These are just some of the questions many business owners find themselves faced with. To help you get a better idea as to what is involved, what you need to do and what choices you have, we have put together the following information.

Who must register for VAT?

Any business with ‘taxable supplies’ exceeding the VAT registration limit during a period of one-year is legally required to register for VAT. The VAT registration limit is currently set at £85,000 and will not change until April 2020 at the earliest. The term ‘taxable supplies’ refers to anything that is normally subject to VAT – meaning that if such good or services do exceed £85,000 you must register for VAT – this includes new business that predict exceeding this limit within their first year of operating.

There are a number of things you must remember, the first being that the limit of £85,000 applies to turnover, not profit – meaning that a large number of businesses will need to register for VAT. In addition, as we have seen, ‘taxable supplies’ refers to any product or service liable for VAT – regardless of the rate of VAT. The only items exempt from this are those that are specifically designated as being VAT exempt. Because of this, it is important that you are clearly aware of the various VAT rates that exist and what effect they will have on your business.

Why should I register for VAT voluntarily?

As a business owner, you have the choice of voluntarily registering for VAT before you reach the £85,000 threshold. There are a number of reasons for doing this, and therefore the decision is ultimately dependent on your individual requirements and situation. There is no denying the decision is an important one for your business, and therefore to help you get a better idea of what is involved and what you need, we have put together the following information regarding the different reasons for registering for VAT voluntarily.

• It allows you to reclaim some VAT. Once your business is registered, you will have to charge VAT on all the goods and services you provide – this is referred to as ‘output tax’. However, you will be able to claim back any VAT that other businesses charge you – this is known as ‘input tax’. As long as your ‘input tax’ is more than your ‘output tax’ over a certain set period, you will eligible to claim back the difference from HMRC.
• It creates a good impression of your business. As you know, to be eligible for VAT, your business needs to reach the £85,000 threshold. Because you know this, it is fairly likely that your clients, competitors and the other businesses you deal with also know it. Therefore, it is not unusual for a business to register for VAT in order to give the impression it is bigger than it yet is, so as to increase its standing and reputation.
• Commercial practicalities. If you are selling to other VAT registered businesses, these customers may not mind you charging them VAT as they, in turn, can claim it back. By choosing to register voluntarily, you will be paid output tax by customers but will benefit by claiming back incurred VAT on purchases. If, however, your customers are not VAT registered, then by charging output tax that they are unable to reclaim you are effectively imposing a 20% price increase to them, potentially making you uncompetitive.

The disadvantages of registering for VAT

Whilst there are undoubtedly numerous benefits to registering for VAT, as with most things, there are also drawbacks – and depending on your circumstances, these drawbacks could result in you deciding not to voluntarily register for VAT.

• Unwanted VAT bill. Once your business is registered for VAT, you will be required to charge VAT on all goods and services. Whilst you can, of course, reclaim back the VAT you pay, if the VAT you charge is higher than the VAT you pay, you will be required to reimburse HMRC with the difference. This can, of course, be a problem for businesses whose purchases and services vary significantly from month to month. Therefore, if you think you will struggle to accurately predict monthly sales and purchases, there is the risk that you will suddenly find yourself with an unexpected VAT bill at the end of the tax year.
• Increased paperwork. There is no denying that registering for VAT will involve more paperwork for you. This will include quarterly VAT returns, as well as the need to insert VAT accounting into your reporting and bookkeeping. There will likely be additional costs for doing this, as well as the threat of penalties should you file reports late or make late payments.

Is it possible to deregister for VAT?

If once registered for VAT your business circumstances change, it is possible to deregister your business for VAT purposes – however, you should be aware that many businesses have experienced difficulties with HMRC when attempting to do this. If your business turnover or taxable supplies are not expected to exceed the £85,000 threshold, you can consider deregistering for VAT. There are various ways of doing this. First, if you voluntarily registered and your business did not reach the £85,000 target, it should be fairly straightforward to deregister. However, if you have previously reached and exceeded this threshold in previous years, you may find it harder to convince HMRC that it will drop below the threshold for the coming year.

Other factors that can lead you to deregistering for VAT include your business completely ceasing to make taxable supplies, or if it becomes classified as part of a bigger group, or if the legal structure of your business changes or the business is sold.

Your next step

Registering for VAT is a big move for a business, and therefore it is important that you take your time and learn as much as you need to know about VAT. The complicity and extra paperwork involved in registering, as well as the threat of fines from HMRC should you make a mistake can understandably put many businesses off. However, registering for VAT can also have a very positive effect of your finances, and therefore the pros and cons of registering must be weighed up before you decide.