Are there benefits of being VAT registered?

I am a freelance graphic designer earning roughly £50,000 per year, I am currently not VAT registered but am wondering if there are any benefits of voluntarily registering for VAT?

 

Benefits of being VAT registered

 

VAT registration threshold

If your VAT taxable turnover exceeds the VAT registration threshold you have to register for VAT – the VAT threshold for 2018 is £85,000.

Your VAT taxable turnover will be the total of your business income that is not VAT exempt or outside the scope.

However, even if you don’t have to register for VAT, you can choose to register for VAT voluntarily if you wish.

 

Voluntary VAT registration – Benefits

 

Reclaiming VAT on your costs

One of the main benefits of voluntary VAT registration would be so that you can reclaim VAT on your business costs (be aware that not all business costs will include VAT).

This may be particularly helpful if you are starting up a new business – in the early days your costs may exceed your revenue and claiming back VAT on your costs could help your cashflow.

Other benefits of VAT registration

As well as being able to reclaim VAT on costs, some other benefits of voluntarily registering for VAT may include:

  • If your turnover is relatively close to the VAT registration threshold then you may inadvertently not realise if you do breach the threshold, which could cause you to be charged with late VAT registration penalties. If you think you are likely to cross the threshold soon, it may be worth registering early to take away this risk and worry.
  • From a prestige point of view, not being VAT registered can make it clear to clients that you are a small business. If you want to appear to be a more sizeable business, VAT registration may help with this.
  • As you will need to be more organised with your accounting records (which is also a drawback covered below) this means your business finances will be in better order which will make it easier when it comes to your annual accounts as well as when it comes to analysing your businesses financial performance.
  • If you are buying goods (and sometimes services) from a supplier in another EC Member State then they will charge local VAT unless you can provide them with a UK VAT registration number.

VAT Flat Rate Scheme

There used to be a financial benefit in voluntarily VAT registering on the VAT Flat Rate Scheme, but HMRC have closed this profitable option down for most service businesses now.

See our article below on this topic:

VAT Flat Rate Scheme Changes

 

Registering for VAT voluntarily might sound like an obvious decision, but there are also drawbacks to consider:

 

Voluntary VAT registration – Drawbacks

 

Commercial pricing impact

If you register for VAT, you will need to add VAT on top of your fees to your UK clients for those sales which are liable to 20% or 5% VAT – you need to discuss with your clients if this additional cost will cause them a financial issue or not.

The standard UK VAT rate is currently 20%. If before VAT registration you charged a client £1,000, after VAT registration this would be £1,000 + £200 of VAT which totals £1,200.

If you are invoicing VAT registered businesses, they are unlikely to have an issue with this as they will simply reclaim the VAT you are charging them when they do their VAT returns.

However if you are invoicing individuals or small businesses that are not VAT registered, they will not be able to reclaim the VAT you are charging them. This means you become more expensive to them than if you are not VAT registered.

Charities are another example of businesses who may not be VAT registered, so they may prefer to hire freelancers who are not VAT registered.

The example at the beginning of this article was that of a freelance graphic designer – this could mean that their clients are a mix of big businesses that are VAT registered and smaller businesses that are not, so they will need to look through their client base to see who may be affected if VAT were to be charged.

It might be that for some clients who can’t reclaim the VAT you are charging them, you may reduce your fees to absorb some or all of the VAT charged, but this will be a commercial decision for you to make.

Administration

Being VAT registered means a little more admin for you and potentially higher accounting fees, depending on whether you will be doing your own VAT returns or not.

You will need to keep a track of your VAT receipts and make sure you claim the correct amount of VAT on a business cost when you are entering it in your book-keeping system.

We have an article below which will help you understand what VAT can be claimed back on costs:

Reclaiming VAT on expenses

HMRC enquiries

Registering for VAT means another type of tax that you could be investigated by HMRC for – obviously if you do things properly and are organised with your record keeping, this won’t be an issue.

 

Voluntary VAT registration – Summary

As you can see from this article, there are both benefits and drawbacks to voluntary VAT registration, you should consider your own specific circumstances carefully and if necessary discuss with an experienced accountant.