Registering Your Small Business For VAT: Pros and Cons

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When it comes to setting up a small business, there are lots of things that you must do as soon as possible. Registering with Companies House, checking your licenses, getting insurance… You might think VAT registration is one of these, too.

But that’s not quite right. Unlike in other countries, not all businesses in the UK must register for VAT. In fact, if your business doesn’t reach the threshold for mandatory registration (VAT taxable turnover above £85,000) there may be an argument for you not registering.

In this article, we’ll discuss both sides of registering for VAT, so that you can understand what you need to do.

What is VAT?

VAT stands for Value Added Tax. It’s added to the price of goods and services by businesses that are VAT-registered. There are different rates of VAT depending on what it is that’s being sold, and it’s one of the biggest sources of government revenue, representing 6% of national income.

Pros of Registering for VAT
  • Increased Cash Flow – One of the most obvious benefits of voluntarily registering for VAT is the financial advantage. When you’re VAT registered, you can apply VAT to the sale of most products or services. And this is the same if you have set-up costs – whether that’s for physical things like IT and stock, or external help like creating a website or using a consultant. You can reclaim the costs of VAT on this, allowing you to get the essentials when starting out while plugging some potential financial gaps.
  • Reputational boost – There’s also a lot to be said about what impact registering for VAT can have on your reputation. When you’re just starting, teaming up with larger companies can boost your reputation – registering for VAT can assist with this. To these companies, a company that has voluntarily registered for VAT can be more trustworthy, and so they could be more likely to choose you to work with over a competitor.  
  • You can backdate your registration – Unlike those obligated to register for VAT, those registering voluntarily can backdate their registration by up to four years. This could mean you’re able to reclaim VAT paid on the equipment you’re currently using – however, sufficient evidence must be supplied to HMRC.
Cons of Registering for VAT
  • Complexity of the process – VAT returns are yet another bit of paperwork for small businesses to deal with. If you can’t assign an employee to handle the complex admin tasks that come with VAT registration, you might need to hire a specialist, which can be costly.
  • Penalties – If you’re not an accounting professional and try to do VAT returns yourself, errors are likely. Late, or completely missed payments, will incur a fine from HMRC. More late filing equals bigger fines, and the bill can get out of control very quickly if you’re not careful.
  • Increased prices – Though registering for VAT might put you in better standing with potential partners in your industry, it could have the opposite impact if you work in the B2C space. As the cost-of-living crisis rumbles on, your average consumer is having to think more carefully about their spending. If you register for VAT, you will have to increase your prices. Consumers comparing your prices with competitors who aren’t charging VAT on top will be more likely to go with the latter.  
Pros of Registering for VATCons of Registering for VAT
Increased Cash FlowComplexity of the process
Reputational boostPenalties for errors and late filing
Ability to backdate registrationIncreased prices due to VAT implementation

The success of your small business depends on the decisions you make, especially at the beginning. Registering for VAT shouldn’t be a decision you jump into. As we’ve seen, there are benefits and drawbacks to doing so. You should base your choice on things you already know about your business – its financial standing, target market, and long-term goals.

Ultimately, there’s no universal answer about whether your business should voluntarily register for VAT. But whatever you choose, making an informed decision paves the way for your business to be financially stable and competitively positioned, both now and in the future.


Need some help with your VAT returns? Sage software has you covered! Contact PKF Smith Cooper Systems today to learn how we can help you implement technology to make your business finances easier to handle.

Contact us on 01332 959008 or use the enquiry form.



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