The pros and cons of voluntary VAT registration
If your business turnover is below the VAT registration threshold and your customers are all VAT registered you might be thinking about the pros and cons of voluntary VAT registration. You might also think VAT registration could be worthwhile if you've incurred significant VAT inclusive costs prior to trading.
When deciding the pros and cons of voluntary VAT registration you should also consider whether your business turnover counts towards the VAT registration threshold.
The amount of VATable expenditure incurred can be a key factor when determining the pros and cons of voluntary VAT registration as you can see from these examples below.
Example 1 - The Pros and cons of voluntary VAT registration
Barry is a builder whose profits as a sole trader are £40,000 a year. The costs of his materials and overheads amount to £14,000 a year (inclusive of VAT)
Barry | VAT registered | Not VAT registered |
|---|---|---|
Total purchases | 14,000 | 14,000 |
Less: VAT | 2,800 | - |
Net cost | 11,200 | 14,000 |
Tax/NI saving Net cost | 3,248 7,952 | 4,060 9,940 |
Overall saving | 6,048 | 4,060 |
Example 2 - The Pros and cons of voluntary VAT registration
Peralta Ltd is a new business. The director Jake estimates turnover for the first year will be £80,000 and overheads subject to VAT will be approximately £18,000.
Peralta Ltd | VAT registered | Not VAT registered |
|---|---|---|
Less: VAT | 18,000 | 18,000 |
Net cost | 14,400 | 18,000 |
Corporation tax saving | 2,736 | 3,420 |
Net cost | 11,664 | 14,580 |
Overall saving | 6,336 | 3,420 |
As you can see from the above examples, there is clearly a cash flow advantage in voluntary VAT registration. However this may not be the case in the following situations:
Is it possible to backdate a VAT registration?
If you're registering for VAT voluntarily then you can backdate a registration by up to 4 years before the date of the application. It is important to include any retrospective date on the application to register for VAT. This is because it is notoriously difficult to change the date after the VAT registration number has been issued by HMRC.
The pros and cons of voluntary VAT registration - practical issues
HMRC will usually issue a single VAT return for an extended period that involves a retrospective VAT registration. You should ensure the most of this opportunity to claim pre-registration VAT on the first return.
You must also notify your clients your business is VAT registered as soon as possible and issue VAT invoices to your clients for sales within the retrospective period. If you fail to do this you may find that your clients are reluctant to accept a late invoice particularly if they are not VAT registered thmeselves.
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