Voluntary VAT Registration: Smart Strategy or Costly Mistake

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Welcome to this week's I Hate Numbers. This week I'm going to be dealing with a topic that may not necessarily get the pole racing, but it's an important topic nevertheless. It's about voluntary VAT registration. That's right. I'm talking about businesses becoming VAT-registered before they, legally speaking,

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have to. It does sound a little bit on the crazy side. Well, it might not be. I'm going to break this down for you and give you the full picture. Let's crack on.

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Now firstly, what is voluntary VAT registration? What I'm going to do is to start with the basics. Now, currently in the United Kingdom, if your business turnover hits 90,000 pounds over the last 12 months, a rolling 12 month period, HMRC says you've got to register for VAT within 30 days of that threshold being exceeded, and I'm talking about volunteering to register for VAT.

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Well, that means obviously you choose when you register before you actually hit that magic threshold. You choose your own terms, but you do it not because you're forced to, but because you think it's a good move to do. Now, it is a proactive move. You are the one who's taken the front foot on this one, and it can have

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big rewards as a result. Now we, before we expand on this, let me examine why many people understandably avoid VAT registration in the first place. First of all, it's the time in the administration to do that, to become that unpaid tax collector on behalf of the government. There's no holiday pay, there's no reward for it.

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It's a necessity to do that, and you operate the system on behalf of the government, collect the taxes, pay them over, or get those refunds. There's going to be the impact on your customers who may not like it. They may suffer. As a result, it may affect your pricing and also your profitability. And the admin is going to eat up your time, eat up your budget if you decide to outsource that.

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Cough. Cough. Now, those are all fair and valid points, but there's also a flip side to this. So, I'm going to flip the coin and actually have a look at the benefits of volunteering to register for VAT. Firstly, from a cash flow point of view, you can reclaim and get back VAT that you've incurred prior to registration.

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The official terminology is pre-registration VAT. That means potentially there may be a bit of a cash injection when you first register for VAT. Now you can go back up to four years. So if you've bought goods, acquired assets, and you still have them on the date that you've registered. You can claim the VAT back on those. If you've incurred any services,

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for example, accounting fees, other professional fees where VAT has been charged, then you can claim that VAT back six months prior to registration. Now you have got to pay for your website, you bought tools, spent money on branding, subscription, professional fees, like accountant fees, and that VAT can come back into your pocket.

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Note of caution, make sure you keep proper VAT invoices and receipts. If you don't have the evidence to back up your VAT claim, then it's likely to be denied to you. Check out the show notes at the end, by the way, for a link to a cloud accounting system, which helps you keep on top of these things. But I digress.

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The second benefit is the cash flow that improved now cash. At the beginning of your business cycle, the middle of your business cycle, and as your business grows, is absolutely paramount and critical. If you do not have access to cash, it's quite simple. Close the lights as you leave the building, you're not going to survive.

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Now, voluntary VAT registration allows you to reclaim VAT on items like laptops, software, stock inventory, and that refund can be a nice little bit of injection and help your bank balance out at the same time. Now, this is in theory over the 30 plus years that I've been in business, I've helped clients reclaim hundreds, even thousands of pounds in VAT, and it makes a difference. Now,

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the third reason is that look of being more professional, a bigger size business than you might actually be. And being VAT-registered still has that cache of giving credibility to your business. Now, clients, especially the large ones, may, and I emphasise the word may, have a preference of working with you

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if you are VAT-registered and it says, I'm serious, I've got internal systems, I'm above board. There's a degree of diligence that's applied and there's a bad mark of professionalism, and this may help you land those bigger contracts. Reason number four is you avoid future hassles and aggravations. So if you are growing, it's only going to be a matter of time before that 90,000 pound VAT threshold becomes a reality.

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If you miss out on that VAT registration, if you're not monitoring your turnover on a month by month basis, that deadline could slip and before you know it, that time has passed and then you're going to be in that arena of fines and penalties and interest. Registering on a voluntary basis puts you ahead of the game.

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You don't miss the registration deadline, you don't have penalties. You don't have interest on overdue tax and the panic is much less. And the fifth reason is it forces you to be more focused and structured in your record keeping. For me, data is the gold that gives us valuable information, and being VAT-registered may focus your attention on having a decent accounting and bookkeeping system from day one.

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Now, as in all these things, there are downsides. So VAT registration isn't for everybody and it isn't a magic fix. Firstly, your prices may be affected. Now effectively, if you are selling B2C or business to consumer, and your clients are mostly non VAT-registered businesses or individuals, they will not be able to claim back VAT,

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so adding 20% to your normal selling price may make you less competitive. There are options and everything in life does have options. You can keep the prices the same. You can absorb that hit on your own profit margin. You can increase your prices slightly, you can enhance the benefit customers are getting from you.

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You might even decide to change the mix of your clients that you do have. And being VAT-registered to me is a sign also of success. Now, if your customers are VAT registered, it is going to be no different to them. Whatever you charge them for VAT, they will be able to claim it back in most cases. So B2B sales are largely academic. Now,

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there is going to be more admin. Thank you, Making Tax Digital - Making Tax Digital, which comes into effect in April 26. Please do check out the show notes for links to podcasts and articles we've written on MTD. You've got digital records, quarterly VAT returns, and you've got to use HMRC-approved software.

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Yes, it's extra admin. If you've done correctly, it's not going to be as arduous as you may think. Once you set it up, it runs smoothly, especially if you've got cloud accounting in place. And as a Xero-Accredited Platinum Partner, we've advised thousands of clients over the years, we have Xero. Again, check out the show notes for any links that you'll find useful.

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Now what about before you even start trading? Now, here's a little-known gem. You can register for VAT, believe it or not, before you even make a single sale. It's called being an intending trader. Sounds grandiose, doesn't it? Now, if HMRC believes that you plan to sell taxable goods or services soon, they'll let you register early, even before you sold anything.

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That means you could claim that on startup costs even before money comes into your bank account. VAT on large purchases already purchased, that's got VAT, you can get back. In essence, who should consider it? It isn't for everybody, but ask yourself these questions. Do you have an intention to grow fast?

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Are you buying from VAT-registered suppliers? Are your customers VAT-registered businesses? Are you in a position financially, time wise to manage the admin or get help with it? If you've answered yes to at least two of those questions, then I would suggest you consider seriously about registering early.

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Now, just a few numbers to throw into the mix. Let's assume you spend 20,000 pounds a year on VAT-related purchases. That's effectively an extra 4,000 pounds worth of VAT that you can claim back. If your clients are in different amount of VAT and your systems are ready that 4K goes straight back to you.

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Now I will point out folks here, VAT is largely a cash flow matter. Because if you are not claiming back VAT, then your cost will be bigger, your profit goes down. Income sales is recorded in the profit calculation, excluding VAT. But generally speaking, if you are selling B2B, you tend to make more profits, believe it or not, by being VAT-registered than you do if you don't.

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Now, here at I Hate Numbers, we're here to help businesses like yours make informed smart decisions, not just knee-jerk ones. So whether it's VAT registration, tax advice, or MTD or anything along that spectrum, we are here to help you. So if you're not quite sure whether it's right for you, don't guess.

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Don't spend endless hours down a rabbit hole on Google. Book a call. Have a chat with us and see where we can help. Until next time, folks, happy VAT registration.