Volunteering for VAT Guide – The Good and The Bad

Filing your VAT return and paying VAT is mandatory for all businesses that make £85,000 or more in a year. Small businesses may decide to get a VAT number, the main reason being VAT claims. Are there any other benefits to volunteering for VAT?

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Benefits to volunteering for a VAT return

VAT Claims

Whilst it isn’t the only reason, it is a valid one. Reclaiming VAT is something that small companies can gain from and can offer to other businesses that are VAT registered. It allows reclaiming on business expenses that have VAT costs attached. An example might include reclaiming VAT on training expenses for certain team members. You cannot reclaim on anything used privately. 

This means that businesses which offer goods or services to other businesses allow those businesses to reclaim VAT. This also works in reverse, so businesses can do this back. The selling business can charge the 20% VAT. The buying business then reclaims this from HMRC, meaning a higher gain for the selling party. 

Because of this, businesses that are VAT registered are more likely to trade with other VAT registered businesses. 

It makes the business look far larger

Businesses that pay VAT look far larger than they might actually be. This is as a direct result of earnings above £85,000 a year being the mandatory point where businesses must start paying.

Invoices will inform customers if they are being charged for VAT. They will notice this, and as VAT is complex, a large number of people will simply know this is what larger businesses charge.

It removes VAT stress from small business

Business expansion can be unexpected, and the last thing anybody wants is for their sudden, massive expansion to turn on them. If a business has made the mistake of not filing a VAT return past the £85,000 mark, then they are at risk of legal action being taken. 

Alongside this, if a business is charging for VAT already, they then have the funds built up to pay for it when legally obligated. If a business hasn’t been charging VAT, the payment towards HMRC will need to be sourced from their profits.

Drawbacks to volunteering for VAT returns

Raising prices

Whilst being able to charge more might ordinarily sound ideal, the extra money made from this doesn’t go to the business. Clients and customers won’t like that they have to spend more for something they have been getting for less, and might decide to go elsewhere. 

If a business doesn’t purchase from other businesses, then early VAT is not at all worth it for them. They would simply be raising their prices to look larger, whilst potentially becoming smaller.

It’s mandatory afterward

HMRC do not distinguish between volunteering to submit VAT returns and being made to due to passing the minimum profit. As a result, once you decide to sign up, you have to then abide by the rules imposed on you.

If you want to cancel

You can of course decide you want to cancel your VAT registration. This process takes 3 weeks to confirm by HMRC, and in the case that you make over £83,000 and should not have canceled, you will automatically be re-registered. Up until the date of your cancellation, you must continue to charge VAT as normal and submit one final VAT return.

The conclusion

Small businesses, whilst they are able to benefit from VAT, should consider whether or not it is efficient. Businesses that just about get by, and those that don’t trade with other businesses should not. Small businesses that do trade with other businesses can, however, as they can reclaim the VAT.

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