Value Added Tax (VAT) affects all types and sizes of businesses operating in the UK. It is important to understand when VAT registration is required, as well as the potential benefits and drawbacks of being a VAT-registered business, all of which we will discuss in this post.
Whilst there is no legal obligation to register for VAT until annual turnover exceeds the ‘VAT threshold’, which is currently £90,000 (2024/25 tax year), there are numerous benefits of being VAT registered, including reclaiming VAT, boosting your corporate image, and opening doors to more business dealings and opportunities.
1. Reclaim VAT
Whether you operate as a sole trader, a limited company, a partnership, or even a charity, becoming VAT registered will allow you to reclaim ‘input tax’, which is the VAT that your business is charged on the goods and services that it purchases.
Many businesses are able to reclaim more input tax than the VAT they collect from their customers (‘output tax’), so you could end up saving money if you register for VAT. Furthermore, you can reclaim VAT from the previous four years on certain business costs, as long as you have the required VAT records and invoices.
2. Enhance your corporate image
If you register your business for VAT, you will receive a VAT registration number. The presence of this number on your website, invoices, and business correspondence will reflect positively on your professional image and enhance your business profile.
Even if your business is small, with annual turnover below the VAT threshold, a VAT number will give the impression of a more sizeable, successful business. This can have a positive impact on your credibility, make it easier for you to compete against more established companies, and help you to attract more customers
3. Access more business opportunities
If you do not have a VAT registration number, it will be immediately clear that your annual turnover is below the VAT threshold. Many suppliers and larger organisations are simply not prepared to deal with businesses that are not VAT registered. Voluntary VAT registration could, therefore, provide access to more suppliers and potential clients, enabling you to compete against more established rivals and grow your small business.
4. Avoid financial penalties from HMRC
If your annual turnover is close to the VAT registration threshold, you may fail to notice if you breach it. If this happens and you do not register for VAT within 30 days of exceeding the VAT threshold, you could face financial penalties from HMRC. Voluntary VAT registration will remove this risk and give you peace of mind.
Disadvantages of VAT registration
Whilst VAT registration offers many great benefits, it is important to be aware of the potential drawbacks, especially if you are considering voluntary registration. These include:
1. Increased commercial pricing
VAT registered businesses must add VAT to the price of the goods or services that they sell. The standard VAT rate is 20%. It is important to consider whether this additional cost is likely to deter current and prospective customers who are not registered for VAT and, thus, unable to reclaim this tax.
Depending on your target customer base, registering for VAT could have a detrimental effect on your bottom line. If you predominantly sell to the general public or non-VAT registered businesses, this is an especially important consideration. However, there is always the option to absorb some or all of VAT that you charge by lowering your prices or fees.
2. Additional administration
VAT registration brings with it additional paperwork, administration, and accounting requirements, resulting in more demands on your time and obligations, as well as potentially higher accountancy fees. If the burden of additional administration and expenses is likely to outweigh the benefits of voluntary registration, it may not be the best decision for your business at the present time.
If you are unsure whether VAT registration is right for your small business, we recommend seeking professional advice from a reputable accountant or tax adviser before making a decision.
VAT Registration Services from Quality Company Formations
Are you currently looking into becoming VAT registered? At Quality Company Formations, our highly-trained team is equipped to handle the formalities of VAT registration for limited companies and LLPs in the UK. There are several ways that our VAT Registration Service can be purchased:
- If you want to set up a limited company, you can order our Fully Inclusive Package, which includes VAT registration. Alternatively, you can purchase any other company formation package and add our VAT Registration Service when you reach the checkout page.
- If you are an existing customer, simply log in to your online client account to your online account, go to the SHOP area, and order our VAT Registration Service for just £39.99.
- If you are not yet an existing customer, use the ‘Log In’ facility (located on the top right-hand corner of our homepage) to register an account. Alternatively, you can create an account here. Once you have registered, visit the SHOP area and purchase our VAT Registration Service for £39.99.
