Many businesses strive to keep their turnover under the VAT registration limit (currently £90,000) because not only are they wary of the additional administrative costs but also because they believe that adding VAT to the invoice will make their business uncompetitive. However, even if a business has not reached the limit, voluntary VAT registration can offer significant benefits, not least including creating a more professional image and enhancing credibility, signalling to customers and potential business partners that the business has reached the VAT threshold, a significant milestone in the growth of any business.
Claiming pre-registration VAT
One of the main benefits of voluntary VAT registration is the financial benefit that can be gained. Input VAT paid on goods or services before registration can be reclaimed, subject to certain conditions. This can result in a much-needed cash lump sum during challenging initial phases for a start-up. VAT on goods (e.g. stock and equipment) can be reclaimed if purchased within four years of registration. The goods must be in stock on the registration date or used to make taxable supplies after registration and not fully used. However, the company must have been in operation for those four years in order to be eligible to make this claim. Additionally, VAT invoices and records must be available from that time.
VAT on services can also be reclaimed, but in a shorter window of up to six months before registration (e.g., a typical cost being for website design paid for five months before registration). The services must have been used to establish the business, and the VAT must not have been passed on to customers. Valid VAT invoices are required to support any input claim.
Improved cash flow
Reclaiming input VAT on purchases can improve cash flow, especially if the business needs to purchase a lot of stock, equipment or services from VAT-registered suppliers. The business can use the reclaimed VAT to invest in other areas of the business, rather than tying up cash in VAT payments.
Improved business opportunities
Many other VAT-registered businesses prefer to work with other VAT-registered suppliers since they can reclaim VAT on purchases.
Ensure registration is on time
Registering the business from the start can help avoid fines or penalties for late registration if the business accidentally exceeds the threshold. This proactive approach ensures that the business is compliant and prepared for any potential growth that might push it over the threshold.
Downsides of voluntary registration
The most evident downside to becoming VAT registered is the requirement for the business to charge customers VAT and thereby increase prices (unless the business makes zero-rated supplies). If customers are VAT-registered businesses themselves, the fact that there is additional VAT to pay will not be an issue for them, as they will be able to reclaim on their own VAT return. However, if the customers are the general public, they will not be able to reclaim, and the higher price may mean they look elsewhere for their purchase (possibly a non-VAT-registered business) – it will depend on what is being sold. Of course, just because a business is VAT registered does not mean the full 20% uplift needs to be passed on to the customer.
Another downside to being VAT registered is the additional administration required, including compliance with Making Tax Digital for VAT.
Practical point
HMRC allows businesses to register as ‘intending traders’. An intending trader is an individual or entity that, on the date of the registration request, is engaged in business activities, has not yet begun making taxable supplies, but intends to do so in the future. Registration is therefore possible even if the business is still in the planning stage. This allows businesses to reclaim VAT on costs incurred during this time, preventing some claims, especially for services, from falling outside the pre-registration time limits.
