The advantages of voluntary VAT registration
What is VAT?
VAT, short for Value Added Tax, is a tax added to most goods and services sold or provided in the UK. Various rates of VAT are charged for different items or services. Right now, the standard rate for VAT in the UK is 20%, although there are reduced rates of 5% and 0% for VAT-exempt items. When businesses register for VAT, they must add VAT to what they sell unless they are selling zero-rated or exempt items. In addition, these registered companies can reclaim some of the VAT money spent on their own purchases, which helps lower their overall spending.
Each business that’s signed up for VAT registration gets its own unique VAT number, which you’ll see on invoices, bills and receipts. This number allows individuals and businesses to check that they are able to reclaim VAT on purchases from that business.
Voluntary VAT registration
Voluntary VAT registration is when a business decides to register for VAT before it has reached the turnover threshold for mandatory registration. The current registration threshold for UK businesses is £90,000 turnover in a rolling 12-month period. If you are a sole trader, a partnership or a limited company then you will have to register the month that your turnover exceeds £90,000 in the last 12 months or if you reasonably expect your future trading period to take you over the UK VAT threshold.
Businesses earning under this threshold are still able to register voluntarily. They may decide to do this for reasons such as enhancing their appearance to other businesses and reclaiming VAT on expenses. However, before registering, it is important to understand the other impacts that VAT registration will have on your compliance obligations and the prices you charge to clients and customers.
What does voluntary VAT registration involve?
Voluntary registration involves you enrolling with HMRC for VAT. HMRC will then issue you with a VAT registration number. Once enrolled for VAT you will have to complete quarterly VAT returns through Making Tax Digital (MTD). MTD obligates businesses that are VAT registered to compile quarterly records of input and output VAT and submit them to HMRC via a compatible software product.
MTD for VAT is a relatively new initiative aimed at improving the accuracy of reporting and simplifying the VAT submission process. To comply with MTD for VAT you will need to use cloud accounting software to track incoming and outgoing money to submit quarterly returns to HMRC. Accounting Software such as FreeAgent, Xero and QuickBooks are MTD compliant and ideal for small businesses to track expenses in real time and submit MTD for VAT returns. These offerings are relatively inexpensive and are a must-have for small businesses that are voluntarily registering for VAT and need to keep digital VAT records.
You must also decide which VAT scheme to enrol on. The standard scheme is the most widely used but for small businesses the Flat Rate Scheme may have advantages. Talking to a qualified accountant about the best scheme for you is advisable. At Sherwin Currid all of our clients have a dedicated accountant who can offer guidance on selecting the right scheme for you. Get in touch to discuss your VAT registration with us.
Who should consider voluntary VAT registration?
VAT registration is beneficial for businesses that deal with VAT-registered suppliers In large volumes. Voluntarily registering for VAT means that you will be able to reclaim any VAT spent on allowable business expenses. For instance, if you are a hairdresser and spend a lot on hair dyes and products, you will be able to recoup 20% of the price you used to pay when not VAT-registered, provided your suppliers charge VAT. This can reduce your costs and lead to a more profitable business with greater profit margins.
Furthermore, being registered for VAT gives your business a more reputable image. Some large firms will only deal with VAT-registered businesses, and therefore, by registering, you will broaden your client base. Having a VAT registration number may also signal that your business is larger and more established than it is due to most people assuming that if you are VAT registered your turnover will be above the £90,000 threshold.
There are also downsides to voluntary VAT registration, such as the increased time cost of tracking and managing your VAT submissions and the decision of how to charge your clients VAT on top of your fee for your goods and services. If you do voluntarily register, then you will also not be able to deregister unless you can show that your turnover is below the 12-month VAT deregistration threshold of £83,000.
Advantages of voluntary VAT registration
Access to VAT refunds on purchases
The main advantage of voluntary VAT registration is the ability to reclaim VAT on goods and services that you purchase through your business. If you deal with large volumes of stock or materials, this can quickly add up to large savings. At the end of each quarter, you total the amount of VAT that you have charged your customers and then take off any VAT charged to you on business purchases to give a net figure that you either owe to HMRC or are due for a refund.
You can also reclaim VAT paid on goods and services bought before you registered for up to 4 years prior for goods you still have or goods that were used to make other goods you still have and 6 months for services. Therefore, if you have purchased things, like IT hardware or machinery, that you still use in your business you will be eligible to reclaim the VAT on these provided it was in the last 4 years. To reclaim the VAT on items you will need to hold a VAT receipt showing that VAT was charged on that purchase by another business that is also VAT registered.
Enhancing Business Credibility
Another benefit of registering for VAT is the enhanced credibility that your business is afforded. Many large companies prefer to deal with VAT-registered businesses as they can not only reclaim the VAT but also take registration as a signal that you are a well established business. Upon registering you will be provided with a VAT registration number that you then include on invoices, showing you are registered.
Being registered for VAT assures customers and clients that you are taking your accounting seriously and are likely to remain in business in the future. Voluntary registration may also indicate you have a larger turnover as people assume that VAT registered businesses have a turnover in excess of the registration threshold.
The VAT schemes
There is more than one VAT scheme and the right one for you depends on your circumstances. Checking with an accountant is the best way to determine which scheme is the most beneficial for you.
Standard VAT scheme
Under the standard VAT scheme, which most businesses use by default, you add VAT to the prices of what you sell at a set rate of 20%. At the same time, you can get back any VAT you’ve spent on your own purchases.
For those signed up for this plan, it’s important to keep track of all the VAT you collect and spend. Unless you have applied for annual filing you must submit quarterly MTD returns. This can be time consuming if you have a large number of expenses as you will need to upload receipts for transactions inclusive of VAT, ensuring the right amount is paid.
Cash basis or accruals basis
You can use the cash basis if your sales are under £1.35 million. This means your only pay VAT and reclaims the VAT on invoices that have been paid or received. This means you won’t have to pay VAT on sales dated in your VAT quarter when you have not received anything from the customer.
The accruals basis works on the invoice date, regardless of when the expense or invoice was paid or received. Most clients will opt for the cash basis so that they do not have the risk of a cash flow shortfall by paying VAT on sales they have yet to receive.
Flat Rate Scheme
The Flat Rate Scheme (FRS) is a simplified VAT system whereby a business pays a fixed percentage of its VAT taxable turnover to HMRC. Your VAT taxable turnover is the total of all sales that would either have VAT added to them or are 0% rated. It does not include sales that are exempt from VAT. The main advantage is that it is simple to use but usually comes at a cost, as most businesses would pay less VAT under the standard scheme.
To be eligible to join the scheme, you must have a VAT-taxable turnover of under £150,000. This requirement will be met if you are voluntarily registering as the VAT registration threshold is below this figure anyway.
Choosing the Right Scheme for Your Business
When deciding which VAT scheme is right for your business, it’s important to consider factors such as cash flow, administrative requirements, and the nature of your business. We recommended consulting with an accountant to determine the most suitable VAT scheme for your business.
How Sherwin Currid can assist in VAT registration
At Sherwin Currid, we get that VAT registration can be tricky, but we’re here to help businesses through it. Our VAT registration service is all about giving you the advice and support you need to make everything go smoothly.
Our team of expert accountants can offer you guidance on voluntary VAT registration. We also offer a VAT management service to reduce the amount of work you have to undertake after registering for VAT.
We use a wide range of cloud accounting software to simplify the VAT process. Your accountant will be able to explain to you the best software to suit your needs.
If you would like advice on VAT registration or management then please get in touch with one of our team and we would be happy to help you.