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Is it worth voluntarily registering for VAT?

By Catherine Pope

December 18, 2019


I remember being delighted when VAT was increased to 20%. Not because I wanted to pay more for my chocolate biscuits,1 but because it was so much easier to calculate than 17.5%. Unfortunately, the standard rate is the simplest thing about VAT.

In this post, I’ll give you an overview of how VAT works, explain a few benefits of VAT registration, and also point out some of the downsides.

Before registering for VAT, you should definitely speak to your accountant. VAT registration brings many financial responsibilities, along with some stiff penalties for non-compliance.

What is VAT?

Value Added Tax, or VAT, is a tax applied to the sale of goods and services. Businesses and sole traders with an annual turnover above £85,000 are obliged to register and then charge their customers VAT, even if the customer isn’t VAT-registered themselves. A benefit of VAT registration is that you can then claim back the VAT on any goods and services you’ve purchased for your business. The amount you pay to HMRC each quarter is the difference between the VAT you’ve charged your customers and the VAT you’ve paid on your purchases.

For example, say your turnover for the first quarter is £30,000. Of this total, £5,000 is VAT. You’ve bought various bits of kit, supplies, and paid rent on your office, amounting to £3,000. The proportion of those costs that’s VAT is £500. So, to calculate your VAT bill, you deduct the VAT from your purchases from the VAT you charged on sales. In this case, you give HMRC £4,500.

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Watch Out!

Some of that VAT money will be sloshing around in your bank account for a few months before you need to pay it. Make sure you don’t spend it!

This hopefully seems quite simple so far. However, there are a few different VAT rates and schemes.

Different VAT Rates

You’ve probably noticed that VAT isn’t charged on everything and the rate sometimes varies. There are four rates:

  • Standard – that’s the 20% charged on most goods and services
  • Reduced – home energy, sanitary towels (controversially) are charged at 5%
  • Zero – applied to printed books, newspapers, children’s clothes, many foods
  • Exempt – health services provided by registered professionals, education provided by a school/university/college

If you’re a publisher, you wouldn’t charge VAT on paperbacks, but you’d need to charge it on ebooks (which are now on the standard rate).

Unless you’re selling zero-rated, exempt, or reduced products/services, you must charge 20% VAT once you’re VAT-registered. Remember, this is mandatory if your turnover exceeds £85,000.

This might sound unattractive if you have a good turnover but not much in the way of overheads. You get the faff of VAT without the benefits. Well, meet the flat-rate VAT scheme.

The Flat-Rate VAT Scheme

The flat-rate is a different system that benefits some eligible businesses. Under the flat-rate scheme (FRS), you still charge your customers VAT in the usual way, but you give only a percentage of it to HMRC. Sounds like a good wheeze, doesn’t it? The snag is that you can’t reclaim the VAT on your purchases unless you buy an eligible asset costing more than £2,000. The amount of VAT you pass on to HMRC depends on your business type. For instance, if you’re offering secretarial services, the rate is 13%; for accountants it’s 14.5%. Here’s what it looks like for Neil, a virtual assistant who invoices a total £45,000 over the year:

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How it Works

  • Total VAT charged to his clients @ 20% = £7,500
  • Total VAT payable to HMRC @ 13% = £5,176.99
  • Saving = £2,323.01
  • Neil pockets £2,323.01, but he can’t claim back the VAT on the software and stationery he buys. This works well for Neil, as his overheads are small and he works only for large clients who can claim back the VAT on his fees.

    For more information on the flat-rate scheme, take a look at HMRC’s webpages.

    How to Register and Pay VAT

    Before registering, speak to an accountant to make sure it’s the right move for you. Once you’re registered, it’s tricky to deregister.

    You can register for a VAT Online Account through the Government Gateway.

    If an accountant will be managing VAT for you (which is highly recommended), you’ll need to nominate them as an agent to act on your behalf.

    There are a few stages, so be patient!

    Not all VAT registrations are accepted. For instance, HMRC might decline your application if they decide you’re a tiny business and unlikely to generate much taxable revenue. Of course, the scheme exists to generate income for the government, not to help businesses. You can appeal by providing supporting evidence.

    Once you’re registered, you have to submit your quarterly VAT return online, using a Government-approved system. This is part of the Making Tax Digital initiative. Most of the major accounting software providers such as Xero and FreeAgent will have this covered. You can no longer submit paper-based forms.

    You have to submit a VAT return, even if there’s nothing to pay or reclaim. If you do owe money, you can pay by standing order, direct debit, bank transfer, or corporate credit card. The due date appears on your VAT return. Any refunds are transferred to your bank account (make sure you provide the details when registering), usually within 10 days of submitting your return.

    It could be worth voluntarily registering for VAT if:

    • You have a lot of overheads on which you’re paying VAT, e.g. office space, raw materials, software
    • Your clients are mainly large businesses (although please note: as they’re usually exempt-rated, universities and NHS are often unable to reclaim the VAT)
    • You’re approaching the threshold

    You can reclaim VAT on purchases made in the six months before registration, and also on some expenses within the previous four years.

    Voluntary VAT registration could be disadvantageous if:

    • Your business mainly serves individuals – e.g. you’re a hairdresser or a gardener, those customers will see a 20% hike in your charges. They might baulk at this increase and ditch you for somebody cheaper. Essentially, it can make you less competitive.
    • You’re managing all your accounts yourself. Hiring an accountant could cost more than you save.
    • You’re pants at managing cash flow. You’re probably receiving income monthly, but you need only stump up the VAT quarterly. This means there’s often some extra cash sloshing about in your account. Some people use this to help their cash flow; others dip into it and then have a stressful time paying the bill when it’s due. There are expensive penalties for non-/late payment.

    Key Points

    • You’re obliged to register for VAT once your turnover hits £85,000 per year.
    • You must charge 20% on all good and services, unless they’re zero-rated, reduced or exempt.
    • Your clients might be unable to claim back the VAT, making you more expensive.
    • VAT registration brings many responsibilities, so make an informed decision.
    • You should speak to your accountant before taking action to ensure you understand all the implications.
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    Warning

    This is absolutely not financial advice. Please speak to your accountant before deciding to become VAT-registered.

    1. plain biscuits are zero-rated []

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