VAT is an indirect tax payable on consumption of goods and services in the UK by the final consumer. Usually the final consumer is a non VAT registered individual or a business. It is indirect tax, as it is not directly collected by HMRC. A VAT registered business must charge VAT to its customers. A business making more than £81,000 taxable supplies must register for VAT.
There are many small size businesses, which are making less than £81,000 taxable supplier a year. Is it beneficial for them to register voluntarily?
To understand the benefits of voluntary registration, it is important to understand different types of supplies. There are two types of supplies. 1. Taxable supplies 2. Exempt supplies. All goods and services that are standard rated 20% for example furniture, reduced rated 5% for example energy and zero rated 0% for example newspapers are classified as taxable supplies. Exempt supplies means VAT is not applicable on them for example insurance and dental services. A business must sell taxable supply in order to qualify for registration. A business selling only exempt goods or services will not be able to register for VAT.
Voluntary registration will be beneficial for the business which mainly sells zero rated or mix of standard and zero rated goods and services. This means that VAT payable on sales (Output VAT) will be very less. This can possible result in VAT refunds as VAT registered businesses can claim back the VAT (Input VAT) that they have paid on their purchases and acquisitions. While it is not very accurate but having a VAT registration number can help business disguise the size of the business as it is assumed most of the time that VAT registered business makes more than certain amount of turnover per annum.
So, good news for business supplying zero-rated goods and services! However, VAT registration comes with administration responsibilities. Whilst it may be great to have some VAT refund coming to the bank account every quarter, a business must consider the costs of being VAT registered business. The costs involved are administration, storage and accountancy fees.
In conclusion, a business must have a detailed account of how much purchases as well as acquisitions they are making per annum. They must also account for VAT that is paid by them on the purchases and acquisitions. A business supplying only zero-rated goods and services will benefit more of being VAT registered even though it may not be a compliance requirement.