When it comes to VAT registration, many business owners might think it’s only necessary once they’ve reached the threshold set by HMRC, which for the 2024/25 tax year stands at £90,000. However, there’s another route—voluntary VAT registration—that can bring benefits long before you hit that figure. While it may seem counterintuitive to register for VAT if it’s not a legal requirement, many businesses find that it can improve their operations, their relationships with suppliers, and even their reputation with clients.
In this blog, we’ll explore why opting for voluntary VAT registration could be advantageous, especially for small and medium-sized enterprises (SMEs). By registering voluntarily, businesses are able to access various financial, operational, and strategic benefits.
Managing VAT can seem overwhelming
For many SMEs, VAT might feel like another layer of paperwork and compliance they don’t have the time or resources to manage. The prospect of handling VAT returns and keeping up with the frequent changes to VAT rules can seem daunting. It’s understandable that businesses might avoid VAT registration until it becomes absolutely necessary. However, this could mean missing out on opportunities that come with registering early.
Missing out on potential savings and credibility
By not registering for VAT voluntarily, businesses could be missing out on several key advantages, including claiming back VAT on purchases and boosting their credibility in the eyes of suppliers and customers. Clients, especially those who are VAT-registered themselves, may see non-registered businesses as less established. The perception that you are not yet VAT-registered can also create the impression that your business is smaller or newer than it actually is.
Why voluntary VAT registration could be the answer
Let’s break down some of the tangible benefits of voluntary VAT registration:
1. Reclaim VAT on business expenses
One of the most significant advantages of being VAT-registered is the ability to reclaim VAT on your business purchases. This can be especially beneficial for companies with high overheads or those investing significantly in equipment, stock, or property. By registering for VAT, you can reclaim the VAT on eligible purchases, reducing your overall business costs.
For example, if you’ve purchased £10,000 worth of equipment, with £2,000 of that being VAT, you can reclaim that £2,000 if you’re VAT-registered. Over time, reclaiming VAT can significantly affect your business’s bottom line.
2. Enhance your business’s credibility
Being VAT-registered can lend an air of professionalism and credibility to your business. Clients and suppliers may view VAT-registered businesses as more established and trustworthy, particularly when dealing with larger contracts. For VAT-registered clients, working with a VAT-registered supplier makes it easier to account for VAT, which can improve your standing with potential customers.
In sectors where perception matters—such as consultancy, technology, and construction—the decision to register for VAT voluntarily could give your business an edge over competitors who are not registered.
3. Avoid the rush when you hit the threshold
For businesses edging closer to the VAT threshold, voluntary registration can prevent the last-minute scramble when you’re required to register. Registering early means you’re ahead of the game if your turnover is growing steadily. You’ll avoid the stress of meeting the registration deadline at a time when you might be focusing on other aspects of business growth.
It’s also worth noting that once you surpass the £90,000 threshold, you’re required to register within 30 days. Missing this deadline could lead to penalties and interest charges. By registering voluntarily, you won’t have to worry about this.
4. Improved cashflow management
Once registered, you’ll charge VAT on your sales and submit VAT returns to HMRC. Depending on your accounting method, this can help smooth out cashflow, especially if you operate on the VAT cash accounting scheme. Under this scheme, you only pay VAT to HMRC when you receive payment from customers, rather than when you issue invoices. This can give you a little more breathing room when managing your cashflow.
On the flip side, it’s important to remember that you’ll need to submit VAT returns regularly—usually quarterly—and pay any VAT owed to HMRC. While this adds an administrative layer, modern accounting software can make VAT tracking and submission much simpler. Many accounting firms, like us, can also take care of this process for you, ensuring everything is submitted on time and in compliance with HMRC regulations.
5. Potential for flat rate VAT savings
For businesses with relatively low VATable purchases, the VAT Flat Rate Scheme can be a simpler way to manage VAT while potentially saving money. The flat rate scheme allows you to pay a fixed percentage of your turnover to HMRC, instead of calculating the difference between VAT on sales and purchases. The percentage you pay depends on your business sector.
This could simplify your VAT accounting and, in some cases, reduce your VAT liability. However, it’s essential to calculate whether the flat rate scheme is right for you based on your specific circumstances.
6. Stay ahead with Making Tax Digital (MTD)
VAT-registered businesses with a turnover over the £90,000 threshold must comply with Making Tax Digital (MTD) requirements, which means keeping digital records and submitting VAT returns using compatible software. While businesses below the threshold are not yet mandated to follow MTD, getting on board early by registering voluntarily means you’ll be prepared for any future changes.
Furthermore, using digital tools to manage VAT can streamline your bookkeeping, reduce errors, and ensure that your tax submissions are more accurate and timely.
Is voluntary VAT registration right for your business?
While voluntary VAT registration can offer numerous benefits, it’s not suitable for every business. For instance, if your clients are primarily individuals or non-VAT registered entities, charging VAT on your services might make your prices seem less competitive.
It’s also important to weigh up the administrative burden of filing regular VAT returns and managing VAT invoices. However, with modern accounting software and support from a trusted accountancy firm, these concerns can often be mitigated.
Smith Butler is here to help you assess whether voluntary VAT registration makes sense for your business. By taking into account your turnover, expenses, and client base, we can provide tailored advice on whether VAT registration is a smart move for you.
Thinking of registering for VAT? We’re here to help – get in touch today.