When it comes to building your business, there are so many options to decide upon - whether to become a limited company or stay a sole trader; when to grow your business and employ new team members or to use freelancers; and the age-old question of whether to register for VAT voluntarily. Some of my clients ask me prior to their turnover requiring they register mandatorily. This is called Voluntary Registration, which can be carried out at any time of your business life prior to the current £85,000 turnover threshold for registering for VAT. Now, why would you want to register before having to? There are several reasons:
- Reclaiming VAT - you can reclaim VAT that you are charged by other businesses. For example, if your rent for your offices is £1,000 +VAT per month, when you become registered for VAT you can claim the £200 of VAT you pay, back.
- Appeal to larger companies - as the threshold is currently a turnover of £85,000, being VAT registered can help you increase your standing to potential clients and have the ability to compete with other companies if you are looking to have contracts with large businesses.
- You prove you add value - HMRC set the threshold to recognise companies which add value (hence the name, Value Added Tax), it isn’t to say that any business with less than the VAT threshold isn’t adding a huge amount of value, like many companies we know and work with generate value and a massive impact on their industry.
There are, however, some disadvantages to registering for VAT before you have to, these can include:
- Additional VAT taxes to pay each quarter - once you have registered for VAT you will be required to submit quarterly VAT returns and pay HMRC, this can also affect the VAT refund if you spent more than you earned during this period.
- Increased paperwork and accountancy costs - as you now have to submit these quarterly returns, your accountant will need to up the service they provide to you, as well as needing you to spend additional time to check and review your transactions. This is why we always recommend using an efficient software system, such as Xero, which will help ease the admin burden. There are also significant penalties for late filing and late payment, so you must file and pay HMRC on time.
- Using new technology - with the introduction of Making Tax Digital, companies which are VAT registered are the first to be required to be fully digital from April 2019, if you haven’t already registered with technology to assist you, you will need to train in them swiftly.
- Increased costs to your clients - if you become VAT registered you may have to increase your prices to your customers to cover these additional costs or lose profit margins.
You need to consider whether the advantages of being able to claim back the VAT you spend with suppliers outway the additional costs of accounting and time constraints set upon you for the filing of your returns. This can be more suited to certain industries, as they are paying out to other VAT registered business to enable them to provide services to their clients, which would ultimately mean they can claim this VAT back.
