Why you might want to consider voluntary VAT registration for your business

As a business owner, you’re probably well aware of the many decisions that go into managing your company’s finances. One question that often comes up is whether or not to voluntarily register for VAT (Value Added Tax). While it’s a requirement for businesses that exceed a certain threshold of turnover, voluntary VAT registration is an option for businesses with a lower turnover as well. But is it the right move for you?

In this post, we’ll explore the advantages and disadvantages of voluntary VAT registration to help you make an informed decision about whether it’s worth considering for your business.

What is Voluntary VAT Registration?

Before we dive into the pros and cons, let’s quickly review what VAT registration involves. In the UK, businesses with a taxable turnover above the VAT threshold (currently £90,000) must register for VAT. However, businesses with turnover below this amount can choose to voluntarily register. Once registered, your business will charge VAT on eligible sales, and in return, you can reclaim VAT on eligible purchases.

Advantages of voluntary VAT registration

Reclaiming VAT on purchases One of the main benefits of voluntary VAT registration is the ability to reclaim VAT on business-related purchases. If your business buys goods or services from VAT-registered suppliers, you can recover the VAT you’ve paid. This can be especially useful for businesses that incur significant costs on materials, equipment, or services that are VAT-exempt or VAT-inclusive.
Example: Let’s say you’re a small retailer who purchases stock from VAT-registered wholesalers. If you voluntarily register for VAT, you can claim back the VAT you paid on those purchases, reducing your overall expenses.
Improved cash flow management If your customers are VAT-registered businesses themselves, they can reclaim the VAT you charge them, meaning you don’t have to absorb the tax. This can improve cash flow by allowing you to keep more of your revenue upfront. This is particularly beneficial for B2B (business-to-business) companies, where transactions often involve large amounts of VAT.
Enhancing your business credibility For some businesses, being VAT-registered can enhance their credibility. Being VAT-registered suggests that your business is established and serious, which may help you attract new customers, especially larger clients or those who are also VAT-registered. It can give the impression of a more professional, robust operation.
Seizing opportunities for growth Once you’re VAT-registered, your business will be able to trade with larger companies who are VAT-registered themselves, as they often prefer dealing with other VAT-registered businesses. This can open doors to new opportunities and growth, especially if you want to expand into new markets or work with higher-value customers.

Disadvantages of voluntary VAT registration

Increased administrative burden The biggest downside to VAT registration is the additional paperwork and administration. You’ll need to keep accurate records of VAT on sales and purchases, file regular VAT returns (usually quarterly) and ensure compliance with VAT regulations. This might be manageable if you have the right systems in place, but it can be time-consuming for smaller businesses, especially if you don’t have the resources to hire additional staff or outsource to an accountant.
Potentially higher costs for non-VAT registered customers If you mainly deal with individual consumers or businesses that aren’t VAT-registered, charging VAT on your sales could make your products or services more expensive for them. While VAT is reclaimable for VAT-registered businesses, non-VAT-registered customers won’t be able to recover the tax, and this could make your pricing less competitive compared to non-VAT-registered competitors.
VAT on exempt or zero-rated goods Some businesses operate in industries where a significant portion of their sales is exempt or zero-rated for VAT (such as certain educational, healthcare, or financial services). If you’re selling VAT-exempt goods or services, you may not be able to reclaim the VAT you pay on purchases that relate to those sales. This could end up increasing your overall costs, rather than offering the financial benefits of VAT registration.
Possible registration traps If your business isn’t growing rapidly, you may find that registering for VAT at an early stage was unnecessary. If you voluntarily register and later realise that your turnover will consistently remain below the VAT threshold, you might end up with additional administrative burden without significant benefits. It's important to weigh the pros and cons carefully to ensure you’re not just adding complexity for no real advantage.

Is voluntary VAT registration right for you?

Ultimately, whether voluntary VAT registration is right for your business depends on several factors, including your turnover, the nature of your products or services, your customer base, and your long-term business plans. If you expect growth or work with other VAT-registered businesses, it may be worthwhile. However, if your business primarily serves non-VAT-registered customers or operates in an industry where VAT isn’t recoverable, it may not make sense.

Before making the decision, it’s always a good idea to consult with a qualified accountant. They can help you assess the potential advantages and risks based on your specific circumstances, and guide you through the VAT registration process if you choose to proceed.

Conclusion

Voluntary VAT registration can offer several benefits, such as the ability to reclaim VAT on purchases, improved cash flow, and enhanced business credibility. However, it’s not without its drawbacks, particularly the administrative burden and potential pricing challenges for non-VAT-registered customers. By carefully evaluating your business needs and consulting with an expert, you can determine whether VAT registration is the right choice to help your business grow.

If you’re considering voluntary VAT registration, feel free to reach out for advice tailored to your situation. We’re here to help ensure your business stays on top of its financial game.