In the recent budget, the VAT threshold was raised to £79,000, allowing many small businesses to trade without the inconvenience, compliance and cash flow issues VAT registration can often bring. Most commonly affected are small turnover retailers dealing with the general public, including hairdressers and takeaway food establishments. The burden of VAT registration usually results in reduced margins as, following registration, the market does not allow for prices to increase by 20%.
However, for some businesses, VAT registration can be beneficial. It is possible to register for VAT voluntarily, even if the VAT registration threshold has not been exceeded. Businesses providing goods and services to other VAT registered businesses should consider the advantages and disadvantages of this: -
- Possible to recover all VAT incurred on expenditure. For goods traders, this could be a substantial amount.
- By taking advantage of the Flat Rate Scheme (FRS), even suppliers of services can see a positive effect to their cash flow. Under the FRS, VAT is charged at 20% depending on the type of business, but not all this has to be passed over to HMRC.
- Being VAT registered, and being able to use your VAT registration number, provides your business with a sense of professionalism and legitimacy in the eyes of your clients and customers.
Please note this is based on the assumption that all business customers are in a position to recover the VAT charged.
- There is a compliance requirement to complete and submit the returns, as well as paying HMRC the collected VAT.
- Compliance issues can result in surcharges, assessment and penalties.
Businesses below the VAT threshold trading with other VAT registered businesses should calculate the unrecovered VAT for the previous year, and consider the potential benefit of VAT registration.
Author: Nigel Smith, VAT Specialist, Tait Walker