Most businesses only start thinking about VAT when their turnover gets close to the registration threshold.
Currently, you must generally register for VAT if your VAT taxable turnover exceeds £90,000 in a rolling 12-month period. But you don’t have to wait until then. You can choose to register voluntarily while your turnover is still below the threshold.
So, should you?
The answer depends on your customers, your costs and how VAT registration would affect your prices.
When Voluntary VAT Registration Can Make Sense
One of the biggest considerations is who you sell to. If most of your customers are VAT-registered businesses, registering early may not have a significant impact on them because they can generally reclaim the VAT you charge, subject to the normal rules.
You may also be able to reclaim VAT on eligible business expenses, including equipment, stock, materials, software and professional fees. This can make voluntary VAT registration particularly worth considering if your business has significant VATable costs or you’re planning to invest in equipment or other resources. Being VAT registered can also make a business appear more established in some sectors, although this shouldn’t be the main reason for registering.
When Registering for VAT Early May Not Make Sense
The situation can be very different if you mainly sell to consumers or businesses that aren’t VAT registered. If your customers can’t reclaim VAT, adding 20% VAT to your prices could make you noticeably more expensive.
Alternatively, you could keep your customer-facing prices the same and absorb the VAT yourself. But, that would reduce your profit margin. For example, if you currently charge a consumer £120, becoming VAT registered doesn’t necessarily mean you can simply increase that price to £144. If the market will only tolerate £120, part of that amount will now need to account for VAT. That’s why understanding the impact on your pricing is so important before voluntarily registering.
Don’t Forget the Extra VAT Administration
Once VAT registered, you’ll also have additional responsibilities. You’ll need to keep appropriate digital records, account correctly for VAT on your sales and purchases, and submit VAT returns to HMRC using compatible software. With good accounting systems in place, this can be relatively straightforward. However, it’s still worth considering the additional administration before registering voluntarily.
Keep an Eye on the £90,000 VAT Threshold
Even if you decide not to register early, make sure you’re monitoring your turnover. The VAT threshold is based on VAT taxable turnover, not profit. It is also calculated over a rolling 12-month period, not simply your financial year. This is where growing businesses can get caught out. You should regularly look at your taxable turnover for the previous 12 months rather than waiting for your year-end accounts.
There are also separate registration rules if you expect your VAT taxable turnover to exceed £90,000 within the next 30 days alone.
So, Should You Register for VAT Early?
There’s no single right answer. If most of your customers are VAT registered and you have VAT to reclaim on business expenses, voluntary registration could be beneficial. You need to think carefully about the effect on your prices and profit margins if you mainly sell to consumers or businesses that can’t reclaim VAT, . If you’re already getting close to the threshold, planning ahead can make the transition considerably easier.
At Greystone Advisory, we can help you look at your turnover, customers, costs and pricing to understand whether voluntary VAT registration makes financial sense for your business. Get in touch with us if you’re approaching the VAT threshold or wondering whether you should register early,
