As your business progresses, it is important to evaluate whether registering for VAT would be necessary or beneficial due to your company's growth.
Becoming VAT registered means that your business must add the correct VAT rate (usually 20%) to all sales invoices and VAT added to your business purchases can be reclaimed.
A digital VAT return must be submitted to HMRC (usually every three months), showing the amount of VAT due or any refund owed to your business.
Do I need to register for VAT?
VAT registration may be voluntary or compulsory depending on the size of your business.
Unless you exceed the £90,000 registration threshold, registering is a matter of preference, there is no real right or wrong answer.
If your turnover in a 12-month period reaches this threshold, registration is mandatory. This period is rolling, not confined to the calendar or tax year, so it is important to keep track of your income on an ongoing monthly basis.
Be aware - if your business goes over the threshold, you must register within 30 days of the end of the month in which you went over the threshold.
How about Voluntary Registration?
If you are below the threshold, you can still register via the HMRC Voluntary Registration which has a range of benefits including:
Reclaiming VAT on most goods and services you buy for your business
Perception – your business is likely to appear bigger and more established
There are many things to consider before becoming VAT registered such as:
Are you planning to grow quickly?
If you believe that you will exceed the VAT threshold within the first year of trading, then you may wish to register for VAT from the very start.
The benefits of doing this are:
Your customers will get used to paying VAT on your sales, and it will remove the need to adjust your pricing when you register.
You can reclaim the VAT on any set-up costs that have VAT on them.
You can set up your business with all systems in place to deal with VAT from the start.
Are most of your customers VAT registered?
Consider your customers before voluntarily registering for VAT. If you tend to work with VAT registered businesses, then they will be unphased that you are VAT registered as they’ll be able to reclaim this from HMRC when they do their own VAT Return.
This means that you can add VAT on your sales without any resistance but can then reclaim the VAT on your purchases. It is also likely to boost your profile with any potential VAT registered customers.
However, if your customers are non-VAT registered or the general public, they cannot reclaim VAT, therefore not being VAT registered could give you a price advantage over registered competitors by not adding VAT to your sales. However, this could limit your business growth.
Are you negatively impacting the growth of the business?
If you purposefully try to stay below the threshold, you are unlikely to keep up with inflation and so your business costs will increase each year, but your turnover remains stagnant, reducing your profits and therefore your own income. This means you will be relatively poorer as the cost of your personal expenses are also increasing with inflation.
Between 2016 and 2025, inflation has seen goods costing £100 in 2016 rise to £134.52 in January 2025, a 34.52% increase. However, the VAT threshold has only increased from £83,000 to £90,000, a mere 8.43%.
Do you pay VAT on a lot of business expenses?
In addition to reviewing your customers, it is also important to review your expenses.
You may find that your main expenses are wages, non-VAT registered freelancers, software, and other items that are not subject to VAT. If this is the case, you may find that if you register for VAT, all you’ll be doing is completing VAT Returns so you can pay over the VAT collected on your sales to HMRC.
On the other hand, if you have substantial costs subject to VAT, such as stock, rent, or equipment, reclaiming this tax each quarter can lower your costs and improve cash flow.
Can I reclaim VAT on costs already incurred?
If you decide to register for VAT, either voluntarily or because you have exceeded the VAT threshold, HMRC will allow you to reclaim VAT on:
Four years of goods if still held within the business.
6 months of services.
Claiming back VAT on historical purchases may require amendments to previously submitted accounts, so ensure to keep your accountant informed.
Reclaiming VAT could be a great way to improve cash flow, especially if you recently bought expensive equipment.
A simpler method for small businesses - Flat Rate Scheme
If your estimated taxable turnover is below £150,000, you can qualify for the Flat Rate Scheme (FRS). You can remain in the scheme until your business income exceeds £230,000.
The FRS is a little different in that;
You’ll charge standard rate VAT to your customers, but you’ll pay a fixed rate of VAT to HMRC (between 4% and 16.5% depending on your business and costs).
You keep the difference between what you charge to customers, and what you pay to HMRC.
HMRC also allows newly registered companies to apply for a 1% discount to their rate for the first year.
One minor drawback of the Flat Rate Scheme (FRS) is the inability to reclaim VAT on purchases, except for specific capital assets exceeding £2,000. However, if your business expenses are minimal or primarily consist of salaries, this scheme may be a good option for your business.
If you would like to know more about this area or help to register for VAT, then do get in touch.
Share this post: