At the moment, you only have to register for VAT when your business achieves an annual turnover of £85,000 or more. For a lot of businesses this just never comes to pass and registering for VAT just looks like a bit of a faff, requiring you to submit quarterly returns and effectively putting your prices up by 20 per cent. Not good.
So when does it make sense to register for VAT if you don't have to?
It can help to think of VAT as a bucket that sits in your business. VAT charged to your customers goes into it, and VAT paid to your suppliers goes out. The remaining amount is paid over to HMRC. If you have paid out more than you have charged, HMRC will reimburse you for the amount of VAT spent. This is rare, but it can happen! There are some famous fraud cases that exploit this (google "carousel fraud, if you're interested).
For a business under the VAT threshold, there are two main advantages of registering for VAT voluntarily:
1. It makes your business look more professional and established. I'm always slightly suspicious of businesses who want to be paid in cash and don't charge VAT - it feels as if they might be gaming the system a little. Charging VAT sets you up as a serious player and that has its benefits!
2. It means you can reclaim the VAT you spend. VAT is like a pyramid scheme - companies registered for VAT reclaim the VAT they are charged on purchases, and charge VAT to their clients. The "cost" of VAT effectively flows through their business. This is why it is often referred to as "output" (Sales) and "input" (Purchases) tax. If you are on the end of the chain and not VAT registered, you can't recoup the VAT you've paid from HMRC or by charging it onto your customers. The VAT stops and becomes a cost to your business.
I've attempted to illustrate this below to make it a bit clearer:
The day to day administration of VAT isn't too bad, once you're set up and a lot can be automated in your accounting system if you use one. Its somewhat more complicated if you're a charity - see my previous blog on charity accounting.
Speak to your accountant or get in touch if you would like more information on the VAT registration process, your VAT returns or VAT for charities.