The Pros and Cons of Being VAT Registered

  • 5 min read

In the UK, VAT (Value Added Tax) registration is compulsory once a business meets certain requirements. These requirements (correct at the time of writing) are:

  • If a business exceeds the £85,000 threshold within a 12 month period
  • If a business expects to exceed the £85,000 threshold within 30 days
  • If a business has purchased more than £85,000 worth of goods for VAT registered suppliers in the EU
  • If a business is outside of the UK, but will be supplying goods and services to the UK

However, some businesses who do not meet the requirements are torn between whether to register for VAT prematurely. 

Related reading: The Basics of Small Business Accounting

For businesses for whom registration is compulsory or voluntary, there are both pros and cons of being VAT registered. 

Here, we outline them.

The benefits of registering for VAT:

  • For businesses that are below the threshold initially, HMRC will identify your business as such on your annual tax returns. This means that no VAT will be charged on your business’s goods or services until your business exceeds the threshold. Then HMRC will  apply VAT automatically, without your business needing to do anything.
  • If a business is new, or just starting out, showing that you are VAT registered can add an air of authority and trustworthiness to your business. New customers are likely to be assured when it is evident that a business has been registered with official authorities, and is therefore genuine.
  • If a business will be providing goods and services to customers or clients who are also VAT registered, the VAT they will incur when purchasing the business’s goods and services will be reclaimable. This could be a selling point for potential VAT-registered customers as they know they will be able to reclaim part of the expense from HMRC.
  • A business below the threshold could use VAT registration as a layer of protection. Businesses who aren’t VAT registered are in all essence announcing to clients and competitors that their annual turnover is less than the limit required. This could put the business at risk of running into difficulties, such as prospective clients using the lower threshold as negotiating power for potentially cheaper deals. Additionally, it may make it more difficult for new businesses to cement their air of experience and authority if, when compared to VAT registered competitors, they are clearly not turning over the same amount of income.
  • If a business has copious startup costs, such as needing premises and equipment, any VAT incurred on those items can be recovered through registration. This means the business is provided with some much needed cash flow sooner, as opposed to having to wait until hitting the £85,000 threshold. Waiting could come too late if the business needs an injection of capital to pay fees.

Of course these advantages do unfortunately come with drawbacks too.

The disadvantages of being VAT registered are:

  • Additional administrative paperwork. HMRC will require regular VAT returns at least four times a year and these must be in line with VAT record keeping rules and requirements. These requirements can be complex at first to understand, so whilst HMRC is lenient if small businesses make mistakes, repeated mistakes could leave businesses liable to penalties. 
  • The price you charge for your goods and services has to increase to account for the VAT incurred on taxable income. Whilst this may not be an issue for clients who can claim VAT costs back, for non VAT-registered customers, the extra expense of your goods and services could prove non appealing.
  • Likewise, businesses who are not exceeding the threshold, but will be providing goods and services to other VAT registered businesses, could lose business through their clients being unable to claim VAT back from their purchase. This could impact a new business securing the custom it needs to survive, especially if it is working in a business to business industry where being able to reclaim VAT is commonplace.
  • A business may have to pay a VAT bill. If your business’s initial output VAT is of a larger amount than its input VAT – as will be the case for most startups and small businesses – the difference will need to be paid to HMRC. This can cause problems for businesses who may have a tighter cash flow, as the bills are marked at 20% which could be a significant cost.

The need to register for VAT is a decision that should be made entirely in line with the needs of the business. If a business will benefit from VAT, it is advisable to register prematurely, but if the difference would not be automatically significant then a business could always wait to see how things progress.

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