Pros and Cons of Voluntary VAT Registration: A Comprehensive Guide
Are you thinking of starting a new business and wondering how Value Added Tax Works?
Did you recently move to the United Kingdom, and you want to track your expenses, including the tax added to each item purchased?
You're on the right blog. In this article, you will understand the process behind VAT, what voluntary VAT registration does, and its impact on your business.
If you're considering voluntary VAT registration, it is essential to understand the pros and cons of voluntary VAT registration. Read along as we explain in detail.
What is VAT?
Value Added Tax is the consumption tax imposed on items or services purchased by VAT-registered businesses in the UK.
This is a tax added to a product at every stage of the supply chain where value is added to it. From the initial point of production through the point of sale, tax is levied on the product at each stage.
Value Added Tax is one of the biggest sources of tax revenue in the world. It is similar to Purchase Tax, only that it now includes the point of sale.
Although tax varies from country to country, more than 150 countries have Value Added Tax (VAT).
However, the average VAT raises about 33% of a country's tax revenue.
Value Added Tax is generally considered unfair to low-income earners as it doesn't charge the wealthy more. So the more they purchase, the more tax they get to pay not considering the level of individual income.
Not every business is liable to register for VAT, only businesses with a £85,000 threshold over 12 months.
VAT is reasonably complex, so seeking professional guidance is essential.
How Does Value-Added Tax Work?
European Commission Taxation The Custom Union explains that the final price of a product is the sum of value added at each proceeding stage. This means that at each stage of the supply chain, tax is added.
An example is that if a product's initial price is £10 with a 20% VAT rate, the consumer will eventually purchase the product for £12.
VATs are added according to the percentage levied on each product.
If the tax on an item purchased is £4, the retailer returns £3 to the manufacturer and £1 to the government.
Manufacturers also pay tax on raw material purchases; they obtain their tax return after items have been purchased from the retail store.
According to the government, the tax generated is used to establish basic amenities for the most vulnerable people.
What is Voluntary VAT Registration?
Voluntary VAT registration is when small businesses with less than the acceptable VAT registration threshold decide to become a VAT-registered business.
Small business owners do VAT registration to benefit their businesses. However, there are pros and cons to voluntary VAT registration, which are stated below:
What Are The Pros of Voluntary VAT Registration?
There are benefits to voluntary VAT registration. Some of these include:
1. Good Credibility
Companies with VAT registration have good credibility. They are more trusted by customers and key players in the industry. VAT registration boosts the company's brand, as this means that your business's annual income has reached the VAT threshold.
2. Accurate Bookkeeping
After registering for VAT, you must send HMRC regular VAT returns that show how much VAT you have received from sales of your products and services and enable you to claim any VAT you have already paid. By doing this, you will be required to keep accurate records of the company's finances, which will help you make more intelligent business decisions.
3. Reclaim your VAT
VAT can be reclaimed on any goods or services you purchase from other companies that have a VAT registration. This can save a lot of money, especially for businesses with large expenditure budgets.
4. Competitive Advantage
Gaining a competitive advantage in the market might come from being VAT-registered, particularly if competitors are also registered. It may also be helpful when submitting a bid for a contract that calls for VAT registration.
5. Foster Partnerships with other businesses
One advantage of having a VAT registration is that you will become a preferred choice of partner for other VAT-registered businesses. This increases the demand for you as a possible trade or business provider.
6. Backdated VAT
Voluntary registration can be backdated up to four years provided HMRC receives adequate proof. This implies that a company would be eligible to recover VAT it has paid for machinery that is still in use.
What Are The Cons of Voluntary VAT Registration?
While there are benefits to Voluntary VAT registration, there are also disadvantages you should be aware of.
1. High Cost on Low Sales
The possibility of incurring debt if your sales drop after registering is a major disadvantage of voluntarily registering for VAT. This is because companies must pay costs associated with VAT compliance even when sales are low.
Therefore, you can find yourself in a tight spot financially attempting to make your VAT payments on time if your sales decline after you've registered.
2. Loose Competitive Advantage
To cover the greater tax burden, VAT registration may require an increase in prices of goods, which could reduce the company's ability to compete in sectors where prices are sensitive. If your competitors are not registered for VAT, it could be a disadvantage to your business as consumers would rather make purchases for a cheaper price.
3. Complex Regulation and Administrative Burden:
Additional administrative duties, including record-keeping, filing VAT returns, and adhering to VAT requirements, are associated with VAT registration. This may increase the business's burden and operational complexity.
4. Trigger Audit
A VAT-registered business is under strict surveillance of tax authorities. The tax authorities can monitor you more closely to make sure you are charging and remitting VAT appropriately, as voluntary registration for VAT puts you on their radar.
Before proceeding to register for VAT, you need to understand the pros and cons of Voluntary VAT registration to help make informed decisions for your business.
Who Can Register For VAT
Different types of businesses are eligible for VAT registration which include: Limited Liability Companies, Sole Proprietorships, Corporate Groups and Business Division, Non-Profits and Unlimited Companies.
Businesses with more than £85,000 annual VAT threshold should register. Failure to register for VAT may attract penalties or fines.
Businesses with less taxable turnover can also choose to volunteer for VAT registration.
How To Register For VAT
Registering for Value Added Tax in the United Kingdom requires a few processes. However, there are some documents required for VAT registration, which are:
- Company details
- Company Registration number
- Unique Tax Reference Number
- Bank Information
- Pay assessment
- Information about corporation tax
To proceed with VAT registration, here are the process to undergo:
- Check for Eligibility: Ensure your business is qualified for VAT registration. If your annual turnover is less than the accepted VAT registration threshold, you should pay HM Revenue and Customs on any VAT that you owe.
- Compile All Necessary Information: Ensure all necessary documents such as financial records, Reference numbers, Company details and Tax reference numbers are available.
- Submit Application: Visit the UK tax authorities website to sunbeam it application alongside the necessary documents.
- Wait for Confirmation: After you’ve registered for VAT you’ll get a nine-digit VAT number which must be included in all invoices you raise, information about how to set up your business tax account, information about when to submit your first VAT return and payment and confirmation of your registration date
- Sign in Government Getaway: To register for VAT, you need to obtain a government getaway User ID and password if you do not already have it. Visit the website, then sign in.
How To Calculate VAT and Add To Prices
The Value Added Tax rate in the United Kingdom is about 20% and there exists a reduced price rate of 5%. To add VAT to the prices of goods and services, you will multiply your price by 1.05 for a 5% rate and 1.20 for a 20% VAT rate.
VAT are exempted for goods that involve baby items or foods which means zero VAT will be added.
Frequently Asked Questions
When To Register For VAT?
You can register for VAT when your business has a turnover of 85,000 VAT registration threshold. If your taxable turnover is less, you can apply for a voluntary VAT registration.
Can I Cancel My VAT Registration?
Yes, VAT cancellation is possible. These are the conditions involved in VAT de-registration:
- If your taxable turnover is below the VAT registration threshold.
- If you decide to stop business or change your type of trade.
- If you’re no longer eligible for VAT registration.
Are There Penalties For Late VAT Registration in the UK?
Late VAT registration is expensive which may not be good for your business. Penalties are attracted if you fail to pay your VAT to HMRC on time.
VAT will be calculated on all sales from the day the business should have been registered. The VAT calculated will be added to the penalty. The rate of penalty is dependent on how much you have defaulted in VAT payment.
Conclusion
In Conclusion, to avoid errors and late payments, you should seek the supervision of professionals in the VAT Registration system.