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Pros and cons of being VAT registered: key factors to consider

Registering for VAT: the pros and cons

Written by Rachel Wait, Contributing writerEdited by Lucinda O'Brien, savings expert, 11 December 2024

Fact Checked

Not all businesses legally need to register for VAT, but is it worth registering voluntarily?

Registering for VAT can make your business appear more legitimate and trustworthy.

Registering for VAT: The pros and cons

If your business doesn’t meet the VAT registration threshold of £90,000, you don’t legally need to register for VAT. However, some businesses choose to register voluntarily due to the benefits it can offer.

If you’re wondering whether registering for VAT could be right for your business, the pros and cons in this guide can help you decide.

Key takeaways

You can voluntarily register for VAT, even when there’s no legal obligation
Registering for VAT can give your business more credibility, plus you might be able to reclaim some of the VAT you’ve paid
Registering for VAT increases paperwork and could lead to a hefty VAT bill
Speaking to a tax advisor or accountant can help you decide whether to register for VAT

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Advantages of being VAT registered

You can reclaim input VAT: If you register for VAT, you can reclaim the VAT on goods and services purchased for your business. This means you can receive a refund from HMRC if you’ve paid more VAT on your purchases than you’ve collected from sales.
It gives your business credibility: Registering for VAT can make your business appear more legitimate and trustworthy to clients and investors, creating a positive image for your business.
It may be etter for business: Similarly, some businesses only work with other businesses that are VAT-registered. Registering for VAT can open up opportunities for your business and enable it to expand.
You can backdate VAT: Newly registered businesses can backdate their registration by up to four years to reclaim VAT paid on business goods they are currently using. You must supply sufficient evidence for this.
Flat rate VAT scheme: If your taxable turnover is under £150,000, you can join the flat rate VAT scheme. This scheme lets you pay HMRC a fixed percentage of your business turnover which can be better for cash flow.

Disadvantages of being VAT registered

More paperwork: Registering for VAT means you must keep accurate VAT records. You also need to submit your VAT returns and pay your tax bill on time. If this is too much for you, you can hire an accountant to do this on your behalf.
Negative impact on pricing and profit margin: As a VAT-registered business, you must charge VAT on the goods and services you sell to customers. This may mean increasing your prices, decreasing their appeal to customers. Alternatively, you can absorb the VAT costs yourself, but this would affect your profit margin.
Potential for a high VAT bill: If your output VAT ends up being considerably higher than your input VAT, you could have a hefty VAT bill to pay. That’s why it’s essential to stay on top of your accounts and have a clear idea of how much you need to put aside for tax.
Strict rules: VAT rules can be complex, and you need to be clear about how much VAT to charge customers, along with any exemptions.
VAT inspections: If your business is VAT registered, you can expect periodic inspections by the tax authorities.

Read more:

Is it worth being VAT registered?

Whether you should register for VAT is a decision only your business can make. If your business taxable turnover is over the VAT registration threshold of £90,000, you must be VAT registered. But if it’s under this threshold you might be wondering whether you should register voluntarily or, if you’re already registered, whether you should deregister.

If you’re comfortable with the idea of keeping accurate VAT records, and your business purchases large quantities of goods from suppliers charging VAT, you might find it’s worth registering. But if the idea of keeping invoices and receipts and filing your tax return on time fills you with dread, you might prefer not to register.

Before you make a firm decision, it’s worth using HMRC’s VAT Registration Estimator to help you get a better idea of how much VAT you might be able to claim and how much you might need to pay if you register for VAT.

It can also be a good idea to speak to a tax advisor or accountant to discuss your business situation and whether it’s worth registering for VAT.

This content is for informational purposes and it's not intended as financial or professional advice. Please talk to a qualified professional for guidance relating to your business' needs.

FAQs

Can I have a limited company and not be VAT registered?

Yes, it’s possible to have a limited company that’s not VAT registered, as long as your taxable turnover doesn’t exceed £90,000 in any 12-month period. If you go over this threshold, or you expect to do so in the next 30 days, you must register for VAT.

What’s the penalty for not registering for VAT?

Penalties depend on how much VAT you owe and how late you’ve registered. The minimum penalty is £50.

If you’re late by nine months or less, you’re charged 5% extra.

If you’re late by more than nine months but not more than 18 months, you’re charged 10% extra. And if you’re late by more than 18 months you’re charged 15% extra.

Can I split by business to avoid paying VAT?

Yes, it’s possible to split your business into two or more separate businesses to avoid registering for VAT. But if you do this, each business must offer different services.

What happens if I temporarily go over the VAT threshold?

If you temporarily exceed the VAT threshold, you may not need to register for VAT and can instead apply for an ‘exception’ for registration. However, to do this, you need to request a VAT1 registration form and be able to prove to HMRC that your taxable income from sales is likely to remain below the deregistration threshold of £88,000 (or £90,000 in Northern Ireland) for the next 12 months.

Can I reclaim VAT on purchases made before registering?

You can reclaim the VAT on purchases made prior to registering:

If they were for goods bought during the previous four years that you still own or which you used to make into products you still own
If they were for services received over that past six years.

Additionally, the purchases must have been for business purposes, and you must have valid VAT invoices or receipts for each item.

How does VAT registration affect pricing for my customers?

When registering for VAT, you need to charge VAT on goods and services sold to your customers. How you do this is up to you. You could add VAT to the current price of those goods and services, meaning your customers pay more. Or you could keep the price the same and pay the VAT out of the money you’ve earned, reducing your profit.