Value Added Tax or VAT is a form of tax that is applied to a product, along each step of the supply chain where value is added. In the UK, companies must register for VAT when their revenue passes a specific threshold. This is currently set at £85,000 over a consecutive twelve-month period. Companies who pass this threshold or expect to pass it in the following 30 days, must register for VAT. However, any company can register for VAT, whether they meet this threshold or not. Some businesses choose to do this because there are benefits to doing so.

Registration

Compulsory VAT registration applies to any business that makes or expects to make a VAT taxable turnover of £85,000 and over, within a twelve-month period. VAT taxable turnover refers to everything that is sold, which is not exempt from VAT, for example most food and drinks are exempt.

The VAT threshold applies to any consecutive twelve-month period, differing to standard taxes which use accountancy periods. This means businesses need to continually complete monthly totals to ensure they’re on top of their turnover.

Once a company meets the £85,000 boundary, they have until the end of the following month to register for VAT. Late registration could lead to a penalty, depending on how late you are and how much VAT that you owe. It’s also worth noting that businesses who expect to exceed the VAT threshold temporarily, can apply for exemption.

As already mentioned, some businesses will voluntarily apply for VAT, even when they don’t have to.

Benefits

One of the major benefits of registering for VAT voluntarily is that it allows businesses to claim back VAT on their purchases. This is particularly useful for companies who purchase large amounts of materials or high-ticket items. In these scenarios, it’s likely that the VAT that a business pays on goods and services (input tax) is greater than the amount they charge for their own goods and services (output tax) and therefore they can keep the difference.

The other major upside to voluntary registration is the effect it has on your reputation. Businesses which are VAT registered are perceived as larger, professional and bankable. In fact, some organisations will even go as far as to avoid non-VAT registered companies as they see them as too small and too much of a risk. Therefore, showcasing that your business is VAT registered can help to improve your prospects, with other businesses and customers.

Disadvantages

It’s worth considering that there are some drawbacks to registering for VAT, the main one being having to charge VAT on your products and services. Increasing the cost of your products can obviously have a detrimental effect on sales. If your customers are also VAT registered then this shouldn’t have much of an effect. However, if your customer is the end-user, this will lead to higher costs.

The other major disadvantage of registering for VAT is the extra work. This includes record keeping, reporting and accountancy. There are also extra processes which need to be followed, including calculating VAT, paying VAT, submission of returns and keeping up to date records on VAT.

As we have established, voluntarily registering for VAT offers unique benefits but it’s not for everyone. Smaller companies, hoping to boost their profile and those who have the resources to cope with the extra admin could benefit from this change.

U-deliver are specialist accountants serving the courier industry with many years of experience in all aspect of VAT. For more information click here U-Deliver: Accountancy and tax services for delivery service providers