Voluntary VAT registration...is it ever a good choice ?

The current threshold for VAT registration is £85,000 If you believe your turnover will exceed this you need to register for one of the VAT schemes and account for VAT to HMRC.

However some people may not be aware that you can also voluntarily register for VAT but why would you do this ?

When you register for VAT you need to add 20% to your selling price and account for this to HMRC but you are allowed to deduct any VAT you incur on goods and services you buy for your business. And it’s this area that we need to consider. Let’s look at a few examples to illustrate.

Ben is a graphic designer who started his business from home. Most of his clients are VAT registered businesses. Ben’s business is below the VAT threshold so he dosen’t charge VAT on his invoices. He does not have large overheads so has very little input tax to reclaim. At this point voluntary VAT registration would not benefit Ben. A little while later Ben decides to move into a rented office and needs to buy some equipment and materials. Ben needs to consider registering for VAT. He will be able to get back the VAT on his office rent and equipment and although he will have to charge VAT to his customers they simply reclaim this as input tax. There may also be a cash flow benefit for Ben if he gets paid before he needs to pay over the VAT each quarter.

Jill started a bakery business from home but now needs larger premises and needs to kit out the bakery. Jill needs to double check that the baked goods she produces are zero rated for VAT this means she won’t have to account for VAT on any of her sales BUT she will be able to reclaim the input VAT she pays on the bakery rent and the equipment she buys. So Jill gets a repayment of VAT each quarter from HMRC helping to reduce her costs and improve her cash flow. For Jill voluntary registration is worthwhile.

Mike starts a company that develops engineering products. He has a separate income from a consulting business. Mike’s company has an intention to trade but it has a lot of costs in equipment and development materials including the rent of a workshop. Mike should consider registering for VAT as he can reclaim all the input tax and will receive a net repayment each quarter from HMRC so like Jill this will obviously reduce his costs and help with cashflow.

See our other informative blog on backdating claims for VAT.