Businesses with VAT-taxable turnover below the compulsory registration threshold can choose to register for VAT voluntarily.
Voluntary VAT registration can be valuable for businesses that sell mainly to VAT-registered customers or incur substantial VAT on equipment, stock and operating expenses. However, it can also increase prices, reduce profit margins and create additional administrative responsibilities.
The right decision depends on your customers, costs, pricing structure, growth plans and the types of goods or services you supply.
This guide explains the main advantages and disadvantages of voluntary VAT registration and the questions to consider before applying.
What Is Voluntary VAT Registration?
VAT registration is compulsory when a business’s VAT-taxable turnover exceeds the registration threshold or is expected to exceed it during the next 30 days alone.
The current compulsory registration threshold is more than £90,000.
VAT-taxable turnover includes supplies that are:
- Standard-rated.
- Reduced-rated.
- Zero-rated.
It does not normally include supplies that are exempt from VAT or outside the scope of UK VAT.
A business below the compulsory threshold can apply for voluntary registration if it makes, or genuinely intends to make, taxable supplies.
Once registered, the business normally needs to:
- Charge VAT on its taxable supplies at the correct rate.
- Issue VAT invoices where required.
- Maintain digital VAT records.
- Submit VAT returns using compatible software.
- Pay any VAT due to HM Revenue and Customs.
- Retain suitable invoices and supporting records.
When Is VAT Registration Compulsory?
You must normally register when your VAT-taxable turnover for the previous rolling 12 months exceeds £90,000.
This is a rolling test rather than a figure checked only at the end of the tax year or accounting year.
You should review the previous 12 months at the end of every month.
A separate test applies when you realise that your VAT-taxable turnover will exceed £90,000 during the next 30 days alone. This may happen when the business agrees a large contract or receives a substantial order.
A business that is close to the threshold should monitor its turnover carefully. Voluntary registration may provide more time to update prices, customer contracts, invoices and bookkeeping systems before registration becomes compulsory.
Who Is Most Likely to Benefit?
Voluntary registration is often more attractive where:
- Most customers are VAT registered and can recover the VAT charged.
- The business incurs substantial VAT on stock, equipment or operating expenses.
- The business is preparing to grow beyond the compulsory threshold.
- Most sales are zero-rated but the business incurs VAT on its purchases.
- Customer contracts and quoted prices can be stated excluding VAT.
- Competitors operating in the same market are already VAT registered.
It may be less attractive where the business sells mainly to private consumers, charities, small non-registered businesses or organisations that cannot recover all the VAT charged.
Advantages of Voluntary VAT Registration
1. Reclaiming VAT on Business Purchases
The main financial advantage is the potential ability to reclaim input VAT paid on eligible business purchases.
Potential claims may include VAT paid on:
- Stock and materials.
- Tools and equipment.
- Computers and office equipment.
- Software subscriptions.
- Commercial rent and utilities where VAT is charged.
- Advertising and marketing.
- Professional services.
- Subcontractor invoices.
- Business telephone and internet services.
The purchase must relate to the registered business’s taxable activities and be supported by a valid VAT invoice.
VAT relating to personal use, exempt supplies or restricted categories may not be fully recoverable.
2. Recovering VAT on Certain Pre-Registration Costs
A newly registered business may be able to reclaim VAT paid before its effective registration date.
Subject to the relevant conditions, this can include:
- Goods purchased up to four years before registration that are still held by the business or were used to produce goods still held.
- Services received within the six months before registration.
The purchases must relate to the business now registered and to its taxable supplies. Suitable invoices and calculations must be retained.
VAT cannot automatically be reclaimed on every historic expense. Goods that have already been sold or completely consumed before registration will not normally qualify under the four-year rule.
3. Less Pricing Impact for VAT-Registered Customers
Where customers are VAT registered and entitled to recover the VAT in full, the VAT charged may not represent a final cost to them.
For example, a business may invoice a VAT-registered customer £1,000 plus £200 VAT. The customer pays £1,200 but may normally reclaim the £200 through its own VAT return, subject to the usual recovery rules.
This can make voluntary registration easier for businesses operating mainly in business-to-business markets.
However, you should not assume that every VAT-registered customer can reclaim the full amount. Partially exempt businesses and organisations with restricted VAT recovery may still experience a real additional cost.
4. Preparing for Business Growth
A growing business may prefer to register before it crosses the compulsory threshold.
This can provide time to:
- Update prices and quotations.
- Explain the change to existing customers.
- Configure accounting software.
- Introduce VAT-compliant invoice templates.
- Train staff responsible for sales and bookkeeping.
- Review customer contracts.
- Establish digital record-keeping procedures.
Registering at a planned point can be easier than making urgent changes after unexpectedly exceeding the threshold.
5. Potential Repayments for Zero-Rated Businesses
Zero-rated supplies are taxable supplies charged at 0%.
A business making mainly zero-rated sales may charge little or no output VAT while reclaiming VAT on eligible purchases.
This can result in regular VAT repayments from HMRC.
Businesses in this position should confirm that their supplies are genuinely zero-rated rather than exempt. Zero-rated and exempt supplies receive very different VAT treatment.
6. Meeting Customer Procurement Requirements
Some commercial customers prefer or require suppliers to be VAT registered as part of their procurement or onboarding procedures.
Registration may therefore help a business qualify for certain contracts. However, a VAT number is not proof that a business is large, financially secure or professionally qualified.
Before registering for this reason, confirm whether the potential customer genuinely requires VAT registration.
Disadvantages of Voluntary VAT Registration
1. Higher Prices or Lower Profit Margins
Once registered, a business must normally charge VAT on its standard-rated and reduced-rated supplies.
This creates two main choices:
- Add VAT to the existing price, increasing the amount paid by the customer.
- Keep the final customer price unchanged and absorb the VAT within the existing amount.
Suppose a service currently costs a private customer £100.
If the business adds standard-rate VAT, the customer price becomes £120.
If the business keeps the final price at £100, approximately £83.33 becomes net sales income and £16.67 is VAT due to HMRC.
This can materially reduce profit margins where customers cannot reclaim VAT and the market will not accept a higher price.
2. Additional Administration
VAT registration creates ongoing administrative responsibilities.
The business must normally:
- Apply the correct VAT rate to each supply.
- Issue compliant VAT invoices.
- Check the VAT treatment of purchases.
- Maintain a VAT account.
- Keep digital VAT records.
- Reconcile VAT control accounts.
- Submit VAT returns.
- Pay liabilities by the relevant deadlines.
- Retain records supporting VAT claims.
VAT returns are usually submitted every three months, although monthly and annual arrangements can apply in some circumstances.
A return must still be submitted for a period with no VAT to pay or reclaim.
3. Making Tax Digital Requirements
New VAT registrations are normally brought into Making Tax Digital for VAT automatically.
The business must use compatible software to maintain required digital records and submit VAT returns unless HMRC has granted an exemption.
This may require:
- A subscription to accounting or bridging software.
- Changes to invoicing and bookkeeping processes.
- Digital links between spreadsheets and filing software.
- Additional bookkeeping support or staff training.
Carter Bookkeeping Services can help businesses select and configure suitable accounting software.
4. Cash Flow Pressure
Under standard VAT accounting, output VAT is normally reported based on the tax point rather than the date the customer pays.
A business may therefore need to pay VAT to HMRC before receiving payment from a slow-paying customer.
Cash flow problems can also arise where VAT collected from customers is used to pay ordinary operating expenses instead of being reserved for the VAT return.
Keeping the VAT element in a separate savings account can help prevent it from being mistaken for available income.
5. Not All Input VAT Can Be Reclaimed
VAT registration does not mean that every amount of VAT paid by the business can be recovered.
Recovery may be restricted where a purchase relates to:
- Personal or non-business use.
- VAT-exempt supplies.
- Business entertainment.
- Certain cars and vehicle costs.
- Purchases without a valid VAT invoice.
- Other blocked or restricted categories.
A business making both taxable and exempt supplies may be partly exempt and need to calculate how much input VAT can be recovered.
6. Pricing and Contract Complications
VAT registration can affect existing quotations, contracts and advertised prices.
Before registering, check whether existing prices are described as:
- Inclusive of VAT.
- Exclusive of VAT.
- Subject to VAT where applicable.
A contract that fixes the total price may prevent the business from adding VAT later. The VAT may then need to be absorbed within the agreed amount.
Consumer-facing prices should normally be displayed inclusive of VAT once registration takes effect.
7. Errors Can Lead to Corrections and Penalties
VAT can become complicated where a business supplies products or services with different VAT rates, trades internationally or makes both taxable and exempt supplies.
Common mistakes include:
- Using the wrong VAT rate.
- Claiming VAT without valid evidence.
- Failing to include all taxable sales.
- Duplicating input VAT claims.
- Entering gross figures as net amounts.
- Missing reverse charge transactions.
- Submitting returns or payments late.
These mistakes can result in additional VAT, interest and penalties.
Business-to-Business Example
A consultant charges a VAT-registered company £2,000 for a project.
Before registration, the customer pays £2,000.
After registration, the consultant charges:
| Invoice Item | Amount |
|---|---|
| Professional services | £2,000 |
| VAT at 20% | £400 |
| Total payable | £2,400 |
If the customer can reclaim the £400 in full, the effective cost remains £2,000.
The consultant may also reclaim eligible VAT paid on software, equipment and other business purchases.
Business-to-Consumer Example
A tradesperson charges private customers £600 for a standard-rated service.
After VAT registration, the business could increase the final price to £720, consisting of £600 plus £120 VAT.
Alternatively, it could keep the final price at £600. The amount would then be divided into:
| Price Element | Amount |
|---|---|
| Net sales income | £500 |
| VAT at 20% | £100 |
| Customer price | £600 |
Unless the business can increase its prices or recover enough input VAT, registration may reduce its profit on each sale.
Consider Your Customer Base
The type of customer is often the most important factor in the decision.
| Customer Type | Possible Effect of Registration |
|---|---|
| VAT-registered businesses with full recovery | Usually less sensitive to VAT added to the price. |
| Private consumers | Cannot reclaim VAT and experience the full price increase. |
| Small non-registered businesses | Cannot reclaim VAT and may compare your VAT-inclusive price with non-registered competitors. |
| Charities | May have limited or no ability to recover VAT, depending on their activities. |
| Partly exempt organisations | May recover only part of the VAT charged. |
| Overseas customers | The result depends on the place-of-supply, export and international VAT rules. |
Consider the VAT on Your Costs
Estimate how much VAT the business could genuinely reclaim.
Review recent and planned expenditure, including:
- Stock.
- Materials.
- Equipment.
- Premises.
- Subcontractors.
- Software.
- Marketing.
- Professional services.
Do not base the decision on the total amount spent. Consider only the VAT that is actually charged, supported by valid evidence and recoverable under the VAT rules.
For example, wages, salaries, loan repayments and many bank charges do not contain recoverable VAT.
Should You Backdate Voluntary Registration?
HMRC may allow voluntary registration to be backdated by up to four years.
Backdating can allow recovery of VAT charged on eligible purchases from the chosen date. However, the business must also account for VAT on all standard-rated and reduced-rated supplies made from that date.
This can create a substantial liability where historic customer prices did not include additional VAT or where the business cannot recover the VAT from those customers.
The effective registration date cannot normally be changed after HMRC has agreed it. The financial effect should therefore be calculated carefully before requesting a retrospective date.
VAT Schemes That May Help
VAT Cash Accounting Scheme
The VAT Cash Accounting Scheme allows eligible businesses to account for sales VAT when customers pay rather than when invoices are issued.
This may help businesses with slow-paying customers because they do not normally pay the sales VAT to HMRC before receiving the customer’s payment.
However, input VAT is also normally reclaimed only when the supplier has been paid.
The scheme is generally available where expected VAT-taxable turnover is £1.35 million or less during the next 12 months, subject to the other eligibility conditions.
VAT Flat Rate Scheme
The Flat Rate Scheme may be available where expected VAT-taxable turnover is £150,000 or less, excluding VAT.
Instead of paying HMRC the difference between output and input VAT, the business applies a sector percentage to qualifying VAT-inclusive turnover.
VAT on most purchases cannot be reclaimed separately, except for certain qualifying capital assets.
Limited-cost businesses may need to use a 16.5% flat rate. The Flat Rate Scheme is therefore not automatically cheaper than standard VAT accounting and should be calculated before joining.
Annual Accounting Scheme
The Annual Accounting Scheme allows eligible businesses to submit one VAT return each year while making advance payments during the year.
It can reduce the number of VAT returns but does not remove the need to maintain digital records or monitor the VAT position.
Questions to Ask Before Registering
- How close is the business to the compulsory threshold?
- Are most customers VAT registered?
- Can those customers reclaim all the VAT charged?
- Will private customers accept a higher final price?
- Can VAT be added to existing contracts and quotations?
- How much eligible input VAT does the business incur?
- Are major equipment or stock purchases planned?
- Does the business make taxable, exempt or mixed supplies?
- Can the bookkeeping system support Making Tax Digital?
- Who will prepare and check the VAT returns?
- How will VAT collected from customers be protected for payment to HMRC?
- Would the Cash Accounting or Flat Rate Scheme be suitable?
A Simple Voluntary Registration Comparison
| Factor | Registration May Be Beneficial | Registration May Be Disadvantageous |
|---|---|---|
| Customers | Mainly VAT-registered businesses. | Mainly consumers or non-registered businesses. |
| Purchases | High levels of recoverable input VAT. | Few costs contain VAT. |
| Pricing | Prices can be quoted excluding VAT. | Market expects a fixed VAT-inclusive price. |
| Growth | Turnover is likely to exceed £90,000 soon. | Turnover is expected to remain well below the threshold. |
| Sales type | Mainly zero-rated taxable sales. | Mainly exempt sales with restricted recovery. |
| Administration | Reliable digital bookkeeping is already in place. | Records are incomplete or maintained irregularly. |
Can You Cancel a Voluntary VAT Registration?
A UK business registered because it makes taxable supplies may generally ask HMRC to cancel its registration if expected taxable turnover for the next 12 months will not exceed the deregistration threshold.
The current deregistration threshold is £88,000.
You must continue charging and accounting for VAT until HMRC confirms that the registration has been cancelled.
Cancellation can also create a final VAT liability on certain stock and business assets held at the cancellation date where input VAT was previously reclaimed.
The possible cost of deregistration should be considered before voluntarily registering to reclaim VAT on high-value assets.
Common Voluntary VAT Registration Mistakes
- Registering for appearance alone: A VAT number does not prove that a business is large or financially secure.
- Ignoring customer type: Consumers and non-registered businesses cannot reclaim the VAT charged.
- Assuming all VAT is recoverable: Input VAT claims remain subject to evidence, business use and recovery restrictions.
- Failing to review existing contracts: The business may be unable to add VAT to an agreed fixed price.
- Choosing the wrong registration date: Backdating can create VAT liabilities on historic sales.
- Spending the VAT collected: The VAT element may need to be paid to HMRC even though it is held in the business bank account.
- Using incorrect VAT rates: Not every sale is standard-rated.
- Failing to configure software: Incorrect opening balances and VAT settings can affect every future return.
- Assuming the Flat Rate Scheme guarantees savings: It can produce a worse result for some businesses.
- Registering without a bookkeeping process: VAT returns must be supported by accurate, reconciled records.
How Carter Bookkeeping Services Can Help
Carter Bookkeeping Services can help businesses assess the practical bookkeeping and cash flow effects of voluntary VAT registration.
Support can include:
- Reviewing sales and customer types.
- Estimating recoverable input VAT.
- Reviewing pre-registration purchase records.
- Setting up VAT within accounting software.
- Creating VAT-compliant invoice processes.
- Maintaining digital VAT records.
- Reconciling VAT control accounts.
- Preparing VAT returns.
- Comparing standard VAT accounting with available schemes.
- Completing a holistic bookkeeping review of existing records.
A bookkeeper can organise and report the relevant figures. Complex VAT liability, partial exemption or international-supply questions may require separate advice from a VAT specialist.
Frequently Asked Questions
Can I Register for VAT Below the Threshold?
Yes. A business can generally register voluntarily if it makes, or intends to make, taxable supplies.
Do I Have to Charge VAT After Voluntary Registration?
Yes. You must normally charge VAT at the appropriate rate on taxable supplies made from your effective registration date.
Can I Reclaim VAT Paid Before Registration?
Potentially. VAT may be recoverable on qualifying goods purchased up to four years before registration and qualifying services received within six months before registration, subject to the conditions.
Is Voluntary VAT Registration Better for B2B Businesses?
It is often easier where customers are VAT registered and entitled to recover the VAT charged. However, input VAT, pricing, administration and customer recovery restrictions must still be considered.
Will VAT Registration Make My Business Look Larger?
Some customers may expect suppliers to have a VAT number, but registration does not confirm the size, profitability or reliability of a business.
Do I Need Accounting Software?
VAT-registered businesses must normally keep required digital records and submit VAT returns using software compatible with Making Tax Digital for VAT.
How Often Are VAT Returns Submitted?
Most businesses submit VAT returns every three months. Different arrangements may apply to businesses using monthly returns or the Annual Accounting Scheme.
Can I Cancel My Registration Later?
You may be able to apply for cancellation where expected taxable turnover is below the deregistration threshold. You must continue following the VAT rules until HMRC confirms cancellation.
Calculate the Effect Before Registering
Voluntary VAT registration can provide a valuable recovery of input VAT, particularly for growing businesses with VAT-registered customers and substantial taxable expenditure.
However, registration can reduce margins or increase prices where customers cannot reclaim VAT. It also creates permanent bookkeeping, invoicing and reporting responsibilities until the registration is cancelled.
The decision should be based on realistic figures rather than the assumption that VAT registration is always beneficial or automatically makes a business appear more established.
Contact Carter Bookkeeping Services to discuss the bookkeeping and cash flow implications of voluntary VAT registration.