The Pros and Cons of Being VAT Registered

being VAT registered

Value Added Tax (VAT) is a tax on the sale of goods and services in the UK. While being VAT registered comes with admin responsibilities, it can also give your business financial benefits. Understanding the key pros and cons will help you decide if voluntarily registering for VAT is right for your company.

The Pros of Being VAT Registered

Reclaim VAT on Purchases

One of the biggest advantages of VAT registration is reclaiming VAT paid on business purchases. This includes being able to deduct VAT on expenses like inventory, equipment, utilities, software subscriptions, contractor services, and more. Registering for VAT enables you to recover a significant portion of VAT paid out, which reduces operating costs and improves cash flow.

Appear More Professional to Customers

Being a VAT registered business makes your company appear more credible and established in the eyes of customers and clients. Displaying your VAT number on invoices, quotes and marketing materials gives the impression you are a serious and compliant operation compared to unregistered competitors. This added legitimacy can help give you a competitive edge and win more sales.

Trade with Other VAT Registered Firms

Many B2B suppliers prefer to sell goods or services to fellow VAT registered companies. This enables them to also reclaim the VAT element on their sales. Having a VAT number broadens your supplier options and enables smoother trading with other registered firms.

Required for Some Industries

While voluntary VAT registration is optional for some, it is mandated for others once annual turnover exceeds £85,000. Sectors like ecommerce marketplaces have additional VAT registration requirements as well. Mandatory registration prevents non-compliance issues when operating in VAT-liable industries.

Sell to Overseas Customers

Being VAT registered makes it much easier to sell and export products or services to customers based in the EU and other international markets. It shows foreign buyers you are VAT compliant and simplifies international trade.

Growth Mindset

Voluntarily registering before hitting the compulsory VAT turnover threshold prepares you for growth as you will have operational systems in place and the psychologically prepare you for growth.

business growth

The Cons of Becoming VAT Registered

Increased Administration

Registering for VAT comes with substantial administrative responsibilities that take considerable time and effort. You must meticulously track sales and expenses, keep digital records, issue correct VAT invoices, submit quarterly VAT returns, comply with VAT regulations, and manage HMRC reporting. This significantly increases bookkeeping and accountancy costs. Hiring extra administrative staff may be required.

VAT Inspections Possible

As a VAT registered entity, there is a small but potential risk of being randomly selected for a VAT inspection by HMRC. Inspections aim to verify you are calculating VAT correctly and complying with all VAT rules. Being subjected to a comprehensive inspection can be stressful and time consuming. You may need to hire specialist VAT accountants to handle the process smoothly.

VAT Debt Risk

If your business suffers declining sales, you could end up owing more output VAT to HMRC than you are collecting from customers. This VAT shortfall would need to be covered from your operating funds, putting your business at financial risk. Carefully monitoring your VAT position is crucial to avoid accruing VAT related debts.

Increased Accounting Costs

Most small businesses need to engage specialist VAT accountants to handle registration, VAT return submissions, navigating complex VAT rules, and ongoing compliance. These professional fees to outsource VAT functions can substantially increase accounting overhead costs.

Lose Competitive Pricing Edge

Adding 20% VAT to your prices can make your business less competitive than smaller unregistered rivals who can offer lower prices by not charging VAT. This could negatively impact sales compared to nimble competitors.

Dealing with VAT Threshold Fluctuations

If your annual turnover fluctuates close to the £85,000 compulsory VAT registration threshold, you may need to repeatedly register and deregister for VAT depending on sales levels. This can be administratively disruptive. Careful sales forecasting is essential to minimize VAT status changes.

Tips for Minimizing VAT Registration Drawbacks

  • Use accounting software to simplify VAT calculations, invoicing, record keeping and reporting.
  • Hire a knowledgeable VAT accountant to handle complex issues and submission processes.
  • Maintain meticulous and detailed sales and purchase records to make completing VAT returns simpler.
  • Factor VAT margins into your pricing and profitability calculations.
  • Obtain expert VAT advice before signing long term customer contracts.
  • Set aside funds to cover any potential VAT liabilities.
  • Strictly follow all VAT laws and regulations to avoid penalties.

Conclusion

Weighing up the pros and cons based on your specific business model will help determine if voluntarily registering for VAT makes sense for your company. While the cash flow benefits can be substantial, the administrative burdens are significant. Seeking expert VAT advice is essential before proceeding to ensure you fully understand the implications.

Published on: Last updated: 26th January 2024