Should I voluntarily register for VAT?

If you expect to make over £90,000 in turnover within a 12 month period, it's required that you register for VAT.

However, if you're not expecting to make over the threshold, you can voluntarily register for VAT. But should you?. It turns out there are pros and cons to consider.

Downsides of Voluntary Registration:

• Additional Administration Burden: There is extra work to be done if you register for VAT, you'll need to complete a quarterly return, and pay the VAT due every three months. However, if you're using an accounting platform like like FreeAgent or Xero, this process is relatively straightforward. VAT returns needs to be filed digitally.

• Pricing Increase: You’ll need to add VAT (20%) to most of your invoices, potentially making your services more expensive for some your clients. However, many of your clients may also be VAT registered, and can claim back the extra 20% - just as you're able to reclaim paying VAT on your business expenses.

• Cash Flow Risks: If clients pay late, you’re still responsible for paying your VAT to HMRC on time. This can lead to cash flow issues, and even penalties from HMRC if you're not careful.

Upsides of Voluntary Registration:

• Reclaiming VAT: You can reclaim VAT on some of your business expenses, which may reduce your costs - for instance, reclaming the VAT on larger items like laptops used for your business, software and subscriptions and professional services like accounting. Bear in mind, you can't make savings on everything, for example, if you're buying services from outside of the UK.

• Professionalism: Some clients prefer to work with VAT-registered businesses, especially larger companies. It gives a sense of a larger or more established business. Whilst clients cannot demand you to be VAT registered, it may help with your credibility.

• Potential for Flat-Rate Scheme: By voluntarily registering, you can opt for the Flat Rate Scheme, which simplifies VAT calculations and could allow you to pay less VAT overall if you have low VAT-able expenses. This scheme lets you pay a fixed percentage of your turnover instead of tracking VAT on every transaction, which can be a time saver and reduce complexity.

Summary

If you feel you'll be getting close to the £90k threshold within a 12 month period, or are planning on investing in to a number of larger business purchases, such as laptops, software and subscriptions, it's worth considering voluntary registration for VAT.

If you're not sure, you can always register for VAT when you hit the threshold.

As always, we recommend speaking with your accountant before making any decisions, and get their advice on whether voluntary registration is right for you.