As one of our most popular articles we have updated this for 2018.
VAT registration is an area that is often misunderstood by business owners. While many are obliged to register for VAT, others choose to do so voluntarily. But when must you register, and when might voluntary registration be a good idea?
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Do I have to register for VAT?
If during the course of any 12 months, your ‘taxable supplies’ exceed the VAT registration threshold, you are legally obliged to register for VAT.
The VAT registration threshold is set at £85,000 for the 2017-18 tax year (and will not change for two years from 1 April 2018). ‘Taxable supplies’ are anything that is subject to VAT. So, if your turnover of taxable supplies exceeds £85,000, or if you know that it will, you must register.
There are a couple of things to remember here. First of all, the threshold applies to turnover rather than profit – so many firms will be obliged to register very quickly. Furthermore, ‘taxable supplies’ includes any product or service that is liable for VAT, at any rate – including 0 per cent. It only excludes items that are VAT exempt. It is therefore important that you understand the different VAT rates, and their impact on your business.
When is voluntary registration a good idea?
Many firms choose to register for VAT voluntarily, before they reach the threshold. This is a big decision that can have lasting implications for the financial health of your business, so it is vital that you think it through properly.
There are a few main reasons that you may wish to register for VAT voluntarily.
• Reclaiming VAT. Although you will have to charge VAT on your goods and services once you are registered (known as output tax), you will also be able to reclaim VAT that you are charged by other businesses. This is known as input tax. As long as your input tax exceeds your output tax in a given period, you will be able to reclaim the difference from HMRC.
• Building impressions. Some firms choose to register for VAT in
order to appear larger than they are. Your clients will probably be
aware of the £85,000 threshold – and if you are not registered they will
know that your turnover is lower than this. You may therefore consider
registration as a way of increasing your standing amongst competitors,
and in the eyes of clients.
What are the downsides to VAT registration?
Despite its benefits, VAT registration also comes with some major drawbacks. In some circumstances these drawbacks will be so significant that they entirely outweigh the advantages.
• Potentially higher costs. As a VAT registered business you are obliged to charge VAT on any relevant goods or services. Of course, you can also reclaim the VAT you pay – but if your output tax (the VAT you charge) exceeds your input tax (the VAT you pay), you will have to pay the difference to HMRC.
This can cause cashflow and financial planning problems for firms where purchases vary from period to period. If you cannot accurately predict your purchases and sales, you run the risk of having a surprise VAT bill at the end of the tax year.
• Increased paperwork. VAT registration also requires
businesses to complete a raft of additional paperwork. You will normally
have to file a quarterly VAT return, and you will have to implement VAT
accounting into your existing bookkeeping and reporting procedures. This
might require you to change or upgrade your accounting software. There
are also significant penalties for late filing and late
Can I deregister?
If you register for VAT and your circumstances subsequently change, it may be possible to deregister your business. While this should be a simple process, many firms report difficulties in persuading HMRC to agree to their request.
The deregistration threshold is £83,000. You can deregister your business if its turnover or taxable supplies will not exceed the threshold in the next 12 months. If you registered voluntarily and your business has not yet reached this threshold, HMRC should have no objection to your deregistration. But if your turnover has previously exceeded the threshold, you may have difficulties persuading HMRC that it will fall within in during the coming year.
You are obliged to deregister your business if it stops making taxable supplies altogether, or if it becomes part of a group. You may also have to deregister if the legal structure changes, or if the business is sold – although the new owner can choose to keep the registration number in some circumstances.
VAT registration is a big step for any business. Many business owners considering voluntary registration are put off by the prospect of increased paperwork and the potential for a hefty bill from HMRC. But VAT registration can also be a good financial decision. Make sure that you properly consider all potential outcomes, and seek advice from your accountant before continuing.