Being VAT Registered is Killing My Business: A Comprehensive Guide

Value Added Tax (VAT) is a consumption tax imposed on goods and services in many countries, including the United Kingdom. While VAT registration is mandatory for businesses that meet certain turnover thresholds, it can have a significant impact on small businesses. In fact, you might have heard someone say how being VAT registered is killing their business, but is this true, and if so, what can be done about it?

In this guide, we will explore the implications of being VAT registered, whether you can lose money being VAT registered, assess the advantages and disadvantages, and provide insights on how to navigate the complexities of VAT.

So, if you have been left bamboozled by more than 11,000 pages of tax legislation in the UK and think that ‘being VAT registered is killing my business’ here’s the simple answer: 

Being VAT registered is not killing your business. It can be a big drain on resources as you must follow many VAT rules and regulations which creates additional admin burden but financially you should not be worse off by being VAT registered. VAT is a consumption tax imposed on goods and services to the end user so your business should not be directly worse off being VAT registered.

So, the short answer is that being VAT registered is not killing your business, and you should not be worse off. There are plenty of pros and cons to being VAT registered. You need to weigh up personal circumstances to decide what is best for your business but bear in mind that the matter could be taken out of your hands when you reach the compulsory registration threshold of £85,000 (2023) taxable turnover. 

We have covered various scenarios below to help you better manage being VAT registered.

Do you lose money being VAT registered?

You do not lose money being VAT registered in fact probably the opposite. Your customers are the ones paying the VAT over to HMRC but being VAT registered enables you to reclaim VAT on purchases that previously would have been unclaimed.

Being VAT registered means charging VAT on your sales and claiming VAT on your purchases. The difference between these two amounts determines whether you owe VAT or receive a refund. While there are administrative costs associated with VAT compliance, businesses can often offset the VAT paid on purchases against the VAT charged on sales, thereby minimising the financial impact.

Whilst it may not feel like it when you are paying the VAT over to HMRC each quarter you must remember that you only have that extra money to pay over as the customer paid it to you – it was never your money in the first place. You are simply an unpaid tax collector for HMRC.

The best way to combat this is to move the VAT received in sales invoices to a separate bank account on receipt. This way you are not using money that does not belong to you in your day-to-day operations and you do not feel the pain when the quarterly VAT payment needs to be made.

Will I be worse off being VAT registered?

You could be worse off being VAT registered. The type of business you operate and the customers you serve could make a difference to how competitive you are.

In certain cases, being VAT registered can result in increased prices for customers, potentially reducing sales or making your goods or services less competitive. Additionally, VAT returns, recordkeeping, and other compliance requirements can add a burden to small businesses. However, it’s important to consider the benefits and exemptions that come with VAT registration.

Where you are in competition with a non-VAT registered business and selling to the end customer i.e. not a VAT registered business who can reclaim the VAT you could end up being 20% more expensive to the end customer for exactly the same service.

Plumber A is VAT registered and charges Mr Smith £100+£20 VAT for a call out. Mr Smith cannot reclaim the VAT, so the total cost is £120. Plumber A would have to pay over the £20 VAT to HMRC so his sales are £100 only but the charge to Mr Smith is £120.

Plumber B is not VAT registered and charges Mr Smith £100 for a call out. The total cost to Mr Smith is now only £100. Who would you choose?

Is it worth a small business being VAT registered?

VAT registration is not mandatory for businesses with turnover below the taxable turnover threshold of £85,000, but voluntary registration can have advantages. It may enhance your credibility, especially when dealing with larger businesses, as they often prefer to work with VAT-registered suppliers. VAT registration also enables you to claim back VAT paid on business expenses.

Registering for Value Added Tax (VAT) in the UK can offer several advantages for businesses:

1. Credibility: VAT registration can enhance the credibility of your business, as it signals that your company has reached a certain level of turnover and is operating on a more substantial scale.

2. Input Tax Reclaim: VAT-registered businesses can reclaim VAT paid on business purchases and expenses, reducing overall business costs. This can be particularly beneficial for businesses with significant input tax, such as those in manufacturing or retail.

3. Competitive Pricing: Being VAT registered allows you to compete more effectively with other VAT-registered businesses. If your competitors are VAT registered and you are not, they may have an apparent price advantage as they can reclaim input VAT.

4. International Trade: VAT registration is often a requirement for businesses engaged in international trade, especially when dealing with other VAT-registered businesses in the EU and beyond.

5. Voluntary Registration Threshold: Even if your turnover doesn’t exceed the mandatory VAT registration threshold, you can choose to register voluntarily. This can be advantageous if you want to reclaim input VAT, perhaps you have some big capital items to purchase and improve your business’s image.

6. Business Expansion: For businesses with plans for growth and increased turnover, VAT registration can facilitate expansion and ensure compliance with tax regulations as turnover rises.

7. Avoiding Penalties: If your turnover surpasses the VAT threshold, failure to register for VAT can lead to penalties and interest charges by HM Revenue and Customs (HMRC). Registering on time helps you avoid such penalties.

It is essential to consider the potential advantages and implications of VAT registration specific to your business circumstances. It’s advisable to consult with an accountant or tax advisor to assess the best approach for your company and ensure compliance with VAT regulations.

For further considerations it might be worth checking out our guide on should I register for VAT as a limited company.

FAQs on VAT killing your business (or not as it happens)

What are the disadvantages of being VAT registered?

Some disadvantages of VAT registration include the potential impact on cash flow due to delayed VAT refunds, the administrative burden of recordkeeping, and the need for regular VAT return submissions. Moreover, the complexity of VAT rules and regulations can lead to errors, resulting in penalties or additional costs.

While being VAT registered in the UK offers several advantages, there are also some potential disadvantages that businesses should consider:

1. Administrative Burden: VAT compliance involves maintaining accurate records, submitting regular VAT returns, and dealing with complex VAT rules. The administrative workload can be time-consuming and may require additional resources or professional assistance.

2. Cash Flow Impact: VAT-registered businesses are required to charge VAT on their sales and collect it from customers. This can affect cash flow, especially if your customers are slow to pay or if there are delays in receiving VAT refunds from HMRC.

3. Price Increase Perception: Charging VAT may lead to a perception of higher prices among customers, as the cost of goods and services includes the VAT amount. Non-VAT registered competitors might appear more affordable to certain customers.

4. VAT Inspection and Penalties: Being VAT registered exposes your business to potential VAT inspections by HMRC to ensure compliance. If errors are discovered, there could be penalties, interest charges, and possible reputational damage.

5. Flat Rate Scheme Limitations: While the Flat Rate Scheme simplifies VAT accounting, it may not be beneficial for all businesses. The flat rate percentage varies depending on the industry, and it might result in higher VAT payments for some businesses.

6. International Trade Complexities: If your business engages in international trade with VAT-registered businesses in other EU countries or beyond, there can be added complexities in dealing with VAT rules, such as reverse charging and compliance with international VAT regulations.

7. Reduced Margins: Businesses unable to pass on the full VAT burden to customers may experience reduced profit margins due to the additional cost of VAT on their supplies.

8. Impact on Small Businesses: For smaller businesses with low turnovers, VAT registration may not be cost-effective. The administrative burden and compliance costs could outweigh the benefits of VAT reclaims.

9. Complexity of Exemptions and Special Schemes: Some industries or specific transactions may be subject to exemptions or special VAT schemes, leading to additional complexities in accounting and compliance.

When considering VAT registration, businesses should carefully weigh these potential disadvantages against the benefits to make an informed decision. Consulting with a professional accountant or tax advisor can help you understand how VAT registration may impact your specific business and financial situation.

How to avoid paying VAT as a business?

Avoiding VAT altogether is not legally feasible for most businesses. However, you may explore options such as structuring your business as a non-VAT entity if your turnover remains below the threshold. Keep in mind that this may limit your growth potential and credibility in certain industries.

Can I have 2 businesses to avoid VAT?

Operating multiple businesses can be an option to avoid VAT, but it must be done legally and genuinely. Setting up separate businesses solely for the purpose of staying below the VAT threshold is considered tax evasion and can result in severe penalties. Seek professional advice before considering such arrangements.

There are many red flags that can trigger an HMRC investigation make sure you are aware of them before proceeding.

Small Business VAT relief

Some countries provide VAT relief schemes for small businesses, such as the UK’s Flat Rate Scheme. These schemes simplify VAT calculations and reduce administrative burdens, making it easier for small businesses to manage their VAT obligations.

 

Pros and Cons of being VAT registered?

Pros:

• Enhanced credibility when dealing with larger businesses.
• Ability to claim VAT back on business expenses.
• Potential to recover VAT paid on imported goods.
• Opportunities to work with VAT-registered customers.

Cons:

• Administrative burdens and recordkeeping requirements.
• Potential negative impact on pricing competitiveness.
• Cash flow challenges due to delayed VAT refunds.
• Risk of errors, penalties, and additional costs.

We have written a detailed guide on the pros and cons of being VAT registered for further details.

Benefits of not being VAT registered?

By remaining below the VAT threshold, small businesses can avoid the administrative burdens and costs associated with VAT compliance. However, they may miss out on certain advantages like credibility, input VAT recovery, and working with VAT-registered customers.

Is it worth being VAT registered as a sole trader?

VAT registration as a sole trader depends on your specific circumstances. If your business deals with other VAT-registered entities or you have substantial input VAT to reclaim, being VAT registered may be beneficial. However, carefully consider the administrative responsibilities and the potential impact on your pricing and customer base.

HMRC VAT business splitting

Splitting a business into smaller entities to avoid VAT registration is considered tax evasion and is strictly prohibited. The HM Revenue & Customs (HMRC) actively investigates and penalizes such practices. It’s important to comply with tax regulations and seek professional advice to structure your business in a legitimate and tax-efficient manner.

Conclusion

Being VAT registered can have both advantages and disadvantages for small businesses. While it may enhance credibility and allow for VAT reclaims, the administrative burdens and potential impact on pricing competitiveness should not be overlooked. 

Ultimately, the decision to become VAT registered should be based on a careful evaluation of your business’s specific circumstances and objectives, seeking professional advice where necessary. Compliance with tax regulations is crucial and attempts to avoid VAT through illicit means can lead to severe penalties and reputational damage.