If your small business isn’t registered for VAT, presumably it’s because your turnover is too low to make VAT registration compulsory (and not because you didn’t realise that there was a threshold).
But even if your turnover is under the VAT registration threshold, your accountant may recommend that you register your business for VAT. Here are five good reasons to register for VAT voluntarily:
Your business deals mainly with other VAT-registered businesses and individuals, and you could reclaim VAT
You’ll have to charge your customers or clients VAT – ‘output tax’. But if you pay for services or goods with added VAT costs, such as legal or accountancy fees, you can claim back the VAT you pay – ‘input tax’. Providing your input tax exceeds your output tax in a given period, you can reclaim the difference from HMRC.
If you regularly pay lots of VAT, but don’t collect a lot (for example, because the things you sell are exempt), then VAT registration could prove pretty useful!
It makes your business look more professional and successful
Other businesses and individuals may (consciously or unconsciously) see your VAT registration as a sign that your business is well-established and successful. You know it doesn’t bring enough in for compulsory registration – but they don’t. This leads on to number 3…
It gives other businesses confidence in you
Some companies prefer not to deal with businesses that aren’t VAT registered. Others just flat out refuse to do so. The inclusion of your VAT number on stationery and invoices may open up new business doors for you.
You can claim back VAT from previous years
Providing you’ve kept proper records that detail the VAT you’ve paid previously, you can claim this back if you still have the goods (or used them to make other goods you still have).
These records should include invoices, receipts, purchase dates and descriptions, plus information of how the items relate to your ‘business purpose’ (i.e. to VAT taxable goods or services that you supply). You can also claim back VAT paid on services.
There is a time limit though – you can only backdate claims for goods for up to 4 years and services for up to 6 months before your VAT registration date. Also, you should reclaim these previous payments on your first VAT Return.
You will avoid accidentally exceeding the threshold and paying fines
If you know your turnover isn’t too far off the registration threshold, it can be easier to register voluntarily. The registration threshold (currently a taxable turnover of £85,000) applies to a rolling 12-month period – not a calendar or financial year.
This means that if your turnover is anywhere approaching this, you need to watch your figures carefully month by month and calculate your 12-month turnover. HMRC also expects you to register anyway if you suspect or know that you’re about to go over the threshold.
You must register within 30 days of your business turnover exceeding the threshold. If you register late, you must pay what you owe from when you should have registered – and you may have to pay a fine, depending on the amount owed and tardiness of registration.
If you think any of these reasons could apply to your business and you don’t have an accountant, now would be a great time to hire one – and make the most of your hard-earned profits!