When you start your new business building your customer base and brand are at the forefront of your mind. Important details like your tax status is often relegated to administrative considerations. These might include setting up a limited company and business bank account.
However, the decision of whether to register for VAT before you reach the threshold can have a significant impact on your company image. Depending on the kind of business you have, it may be the difference between being taken seriously or simply seen as a small and untested start-up.
Arguments for voluntarily registering for VAT
The threshold for VAT registration in the UK currently is £85,000. Once you have reached this figure in sales you are required to register. At this point there is no choice to make. It is mandatory.
Before reaching this level of turnover however, a business in the UK is allowed to voluntarily register for VAT. So why might you do that?
- By registering for VAT it implies that you have reached the sales threshold to do so by law. This is all about image and credibility. This might indicate that you are more established than you are. This is particularly useful for business to business sales (B2B).
- Most established businesses will be VAT registered. Such businesses often prefer to work with other businesses that are VAT registered. Depending on the size of the business there may even be a policy to do so.
- If your business is likely to incur high VAT registered supplier costs before finishing a project for which you can invoice the customer, having the option to reclaim the VAT on those costs is likely to help with cashflow.
- If you expect your business to grow quickly then having the accounting systems in place for when you experience high turnover will be one less thing to worry about when it gets there.
Arguments for not registering for VAT early
While registering for VAT early might suit some businesses, it wont suit all. Depending on the type of business you have and its expected rate of growth, it may be more sensible to wait until the threshold is reached instead. Why might this be the case?
- There is a requirement to complete regular VAT returns and to understand and deliver the paperwork required by the HMRC. This results in an administrative burden which might not be welcome when you are just starting out in business.
- If your business sells directly to the public, being VAT registered will increase the price you need to charge. This might be unwelcome if your competitors tend not to be VAT registered. This might also make it difficult for you to be competitive.
- If you expect your business to be small with gradual growth, then VAT may be an additional burden you can do without.
And finally…
Whether you decide to register for VAT early or wait until your turnover reaches the current UK threshold, you will need to consider VAT when pricing your goods or services. At some point, unless your business is unlikely to turnover more than £85,000, you are going to have to charge VAT. This means you will either need to increase your prices to allow for VAT or you will need to absorb the additional costs.
This is more of a consideration for businesses selling directly to consumers (B2C). When you research competitors to set your prices make sure you look at the VAT status of each company.
People are used to paying more for VAT registered companies and if yours is a business to business (B2B) enterprise it will unlikely be a problem.
Depending on your product or service and your market, B2C businesses may also find a VAT registered company instils a sense of trust and accountability in the minds of your customers.
As you may have gathered, this isn’t a decision that should be made without research. If you need support you could seek professional advice. Ipsos MORI carried out a study on the behaviours and experiences in relation to VAT registration. While dated (2017) page 21 provides an interesting list of reasons people give for registering early for VAT. The HMRC provides an overview on VAT registration. There are also a plethora of accountants and solicitors willing to provide support and advice on the matter.