Pros & Cons of Being VAT Registered (Advantages / Disadvantages)

If you are worried about going VAT registered, please take the time to read our guide which explain the pros and cons of becoming VAT registered. We will explain the advantages and disadvantages of being VAT registered so you can then decide what the correct route for you and your business, or being a sole trader is. 

Before we go on though, it’s important to understand that the choice will be taken out of your hands if you have reached the VAT threshold (£85,000 in 2022), as you must register for VAT at that point.

Despite this, understanding the possible disadvantages and advantages of being VAT registered before you do so will let you plan and implement with confidence. You can then have the peace of mind that you’re doing the right thing… or at least not setting yourself up for a fall.

It is not uncommon to be registering for VAT in a blind panic as you did not know what the VAT threshold is, and your accountant did not tell you until after the event or best-case scenario a few weeks before. This is not a great position to be in.  

If you register late, you must pay VAT on any sales you’ve made since the date you should have registered! You might need to pay a penalty, depending on how much you owe and how late your registration is.

If the business is growing or you are simply pondering whether you are worse off being VAT registered, hold tight while we walk you through the pros and cons of being VAT registered.

If you just want a very quick answer first though, here’s a quick overview and summary:

What are the advantages of being VAT registered? Some of the advantages of being VAT registered are you can reclaim VAT, appear bigger than you are and possibly win more business, and improve your business cash flow.

What are the disadvantages of being VAT registered? Some disadvantages of being VAT registered are you must adhere to more rules and regulations, are subject to deadlines and surcharges, need to manage cash flow better, can appear more expensive to customers, and a VAT return mistake could mean an HMRC inspection.

There’s more to it than that though, so read on if you need help making a decision.

The pros and cons of being VAT registered: what the benefits are

This is just a summary of whether it’s better to be VAT registered, or factors to consider that might not make it worth it. Bear in mind it was reported in 2009 that we have 11,520 pages of the UK tax code making it the longest in the world.  

Pros / advantages and benefits of being VAT registered

With so many pages of tax legislation to consider there must be some great benefits for businesses.

1. Reclaim VAT (pro)

Of course, an obvious choice. Probably the most logical benefit of being VAT registered in the UK is the ability to reclaim VAT on your purchases where applicable.

As a business owner, you will now enjoy the advantages of being VAT registered by getting back 20% of the cost of goods and services that you had previously missed out on. You could choose to pass this saving on to customers if you are buying direct expenses or you can enjoy the cash flow and profit that comes with a 20% saving.

2. Win Big (pro)

As sad as it seems there are still businesses among us who will only do business with companies that are VAT registered and/or limited companies. 

Bearing in mind anyone can do either of those you would think that clever people in big business would choose something a little harder to attain as a badge of honour to assess your worthiness.

That is not the case though and something as simple as being VAT registered could now be the difference between you winning a contract or not.

Whilst you can voluntarily register for VAT most will assume that if you are VAT registered your turnover must be more than £85,000 the current VAT threshold for compulsory registration.

It is at this point that we make the distinction between big and small, proper and hobby businesses.

3. Cash flow (pro)

Another advantage of being VAT registered is that it will help improve cash flow as you are now going to be reclaiming 20% on goods and services. You would have been paying this before but when it’s gone it’s gone.

At least now you can get some of that hard-earned cash back on a monthly, quarterly, or annual basis depending on the type of VAT scheme you choose.

As well as being able to reclaim VAT you will also be charging customers VAT so when you get paid for your goods or services you will be receiving an extra 20% cash on top of our sales value.

Whilst this may feel like a real bonus be cautious as you must pay this over to HMRC when you submit your VAT returns. It might be in your bank account, but it is not your money. Be wary of using this cash for your own purposes.

4. Reclaim VAT 4 years before registration (pro)

A further benefit of becoming VAT registered is that you can now reclaim VAT paid on goods or services bought before you registered for VAT if you bought them within:

• 4 years for goods you still have or goods that were used to make other goods you still have.
• 6 months for services.

You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

Now for the painful but…  

What you have read so far is about as good as it gets, so here’s the truth about all the disadvantages of being VAT registered in the UK.

The cons / disadvantages of being VAT registered (any downsides)

1. Rules and regulations (con)

You didn’t get into business to become a tax collector but being VAT registered will make you exactly that. Worse still, getting it wrong can lead to fines and penalties (here’s what an HMRC investigation looks like), so not only is this a free position you hold with HMRC, but it could cost you money if you make mistakes.

The Value Added Tax Act 1994 contains over 200 provisions. We do not know any small business owners that have time to understand the complexities of the UK tax system but that will be part of your responsibilities when you become VAT registered.

You can employ the help of a bookkeeper or accountant to help with the preparation and submission of the VAT returns but that does not negate your responsibility as the business owner.

Whilst expert help will support you in navigating this tricky area, it’s still one of the downsides of being VAT registered. 

2. Exceptions to the rules (con)

Just when you think you have it nailed you realise that there are exceptions and different rules specific to your industry and when you nail that you find out that the legislation has changed recently, and you didn’t know about it.

When will it stop?

Tax legislation is constantly moving. If you wish to stay on the right side of HMRC you need to have your finger on the pulse and keep it there. 

For complex or larger businesses this can be a job itself and is frequently considered one of the main disadvantages of being VAT registered. 

3. VAT Deadlines and Surcharges (con)

Depending on the frequency of your VAT returns you have now just introduced a bunch of new deadlines into your business. This might be easy if you are disciplined but if you struggle on the organisation side of life this could be problematic.

Failing to submit VAT returns on time can lead to default surcharges and penalties if you default whilst in a surcharge period. If you do not send in your VAT Return HMRC assesses the amount you owe, and the surcharge will be calculated as a percentage of that amount.

To avoid a default, submit your return on time and make any payment to clear HMRC’s bank account by the due date.

If you default, you will be sent a surcharge liability notice which ends 12 months from the end of the latest period in default. If you default during a surcharge period, and there’s VAT outstanding for the tax period in default, you will be charged a default surcharge and the surcharge period will be extended to end 12 months from the end of the latest period in default.

A surcharge assessment will be sent if a surcharge is due.

The surcharge is calculated as a percentage of the VAT that’s unpaid at the due date.

Defaults within 12 months	Annual turnover less than £150k	Annual turnover more than £150k
2nd	No charge	2%
3rd	2%	5%
4th	5%	10%
5th	10%	15%
6th or more	15%	15%

There’s a minimum of £30 for surcharges calculated at the 10% or 15% rates.

HMRC do not issue a surcharge at the 2% and 5% rates if calculated it to be less than £400.

HMRC calculate a surcharge on the amount of VAT not paid on time. You may be able to reduce the size of any surcharge or avoid a surcharge altogether. Do this by paying as much as you can by the due date.

Your liability to surcharge will expire if HMRC receives all your returns and payments for tax periods ending on or before the end of the surcharge liability period on time.

To summarise, of all the pros and cons of being VAT registered, having deadlines is one of the biggest downsides and disadvantages… miss a deadline, and you may get a penalty. 

4. Managing cash flow (con)

You are going to be receiving VAT on sales invoices. This has the effect of increasing the cash inflow to your business.

Wonderful you might say… and now think it’s better to be VAT registered.

However, you might change your mind to view this as a disadvantage of being VAT registered once the end of the month, end of quarter, or end of year comes. You now need to pay the VAT over to HMRC which is a big downside if you have not budgeted for it.

Whilst you may set out with the best of intentions by setting up separate savings accounts to put this money to one side, but something will happen, and you might need to use a little bit at first then a bit more and then suddenly it is gone.

It happens. We’re not judging.

But VAT is not your money. It belongs to HMRC. You are simply an unpaid debt collector for HMRC. Remember that and you might avoid getting yourself into trouble.

5. Being VAT registered can make you more expensive than the competition (con)

If you register for VAT, then you will have to charge VAT to your customers. As such you have automatically become 20% more expensive than you were yesterday and potentially now outpriced yourself compared to the competition.  

Here’s an example

• Electrician A charges £75 per socket.
• Electrician B charges £69 per socket.

If the quality of the work was the same, you would probably go with the cheaper option and pick Electrician B. Consider what happens if Electrician B registers for VAT.

• Electrician B now charges £82.80 (£69 x 1.2) per socket.

That’s fine if he is invoicing another VAT registered company and they can reclaim the VAT the cost to them is still £69 per socket back but if working with the end customer who is not VAT registered, he is now 10% more expensive than Electrician A.  

• When considering the need for 10 sockets that is an extra £78 over electrician A. 

6. Administration and bookkeeping for VAT

Another disadvantage of being VAT registered is that many records kept for VAT purposes will overlap with records for other taxes, but the detailed rules, as well as the retention periods, may differ.

Below we are going to cover just one aspect of the difference between a VAT-registered and non-VAT-registered business when issuing a sales invoice.

You must show the following details on any VAT invoices you issue:

• A sequential number based on one or more series which uniquely identifies the document.
• The time of the supply.
• The date of issue of the document (where different to the time of supply).
• The name, address, and VAT registration number of the supplier.
• The name and address of the person to whom the goods or services are supplied.
• A description sufficient to identify the goods or services supplied.
• For each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency.
• The gross total amount payable, excluding VAT, expressed in any currency.
• The rate of any cash discount offered.
• The total amount of VAT chargeable, expressed in sterling.
• The unit price.
• The reason for any zero rate or exemption.

Items denoted in bold above are what you are required to show on an invoice when you are non-VAT-registered.

Special rules apply to invoices issued under a margin scheme or subject to a reverse charge. You need to follow the rules for such supplies.

If you decide that the bookkeeping has now become too complex for the average small business owner to handle then you could turn to an accountant or bookkeeper to help you create, post, and submit your VAT returns.

This will come at a cost so being VAT registered will ultimately end up costing your small business money in either your time or the cost of external support – a definite downside to a business running on small margins.

You need to weigh up the value of your time trying to learn new skills and continue to keep on top of legislative changes versus that of paying an expert in the field. 

If you conclude there is more value in doing it yourself, consider stopping your business and setting up a bookkeeping or accounting firm.

Bookkeeping is simple. It’s just not easy.

7. Making Tax Digital for VAT (con)

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their taxes right and keep on top of their affairs. HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world.

Also known as the mechanism for closing the tax gap. The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.

The UK tax gap is estimated to be 5.2% of total theoretical tax liabilities (£34.8 billion) from 2019 to 2020 and 4.9% (£32.2 billion) from 2018 to 2019.

Making Tax Digital for VAT was implemented for businesses above the VAT threshold from 1^st April 2019 and for all other VAT registered businesses from 1^st April 2022.

To comply with Making Tax Digital for VAT you need to keep your digital records using compatible VAT record-keeping software that connects to HMRC systems and allows you to store and update records like receipts and VAT invoices digitally.  

It must be able to: 

• Keep and maintain digital records specified in the regulations.
• Prepare VAT returns using these records.
• Communicate with HMRC through a digital link.

Some MTD solutions contain “Bridging software” or a “Bridging Feature” that lets you digitally link data in a spreadsheet to HMRC’s system.

8. Making mistakes and risk of HMRC inspection

An estimated 7% of HMRC inspections are random. The rest are aided by HMRC’s supercomputer ‘Connect’ which ploughs through various records and databases looking for anomalies. There are key signals HMRC will use to decide who to investigate.

By being VAT registered especially with Making Tax Digital you are now under the microscope, even if you have nothing to hide.

Of all the pros and cons of being VAT registered, increasing your chances of being investigated by HMRC when you have done nothing wrong, is certainly no benefit. 

If you are unfortunate to have an inspection having a clean set of books and records goes a long way to satisfy the inspector that you know what you are doing. 

Reconciling the VAT control account and reconciling the turnover in Box 1 of the VAT return goes a long with an inspector when they turn up to check your records. This is something your bookkeeper and accountant should do as standard each return or certainly at year-end to check you have been processing VAT correctly.

8. Cost of hiring a bookkeeper and/or an accountant (con)

A disadvantage of being VAT registered is that you are now required to learn a whole new skillset, carry out new duties and continually monitor for new rules, exceptions to the rules, budget changes and system updates. If that sounds like fun, you probably need to get out more or you could hire a bookkeeper or accountant to do this for you.

This becomes important when you are working out whether it makes sense to become registered for VAT voluntarily or to factor into budgets and plans for when you reach the VAT threshold which currently sits at £85,000 taxable turnover.

Not all bookkeepers and accountants are created equal so you will need to do your homework to make sure you find a good one. 

Take into consideration the industry in which you operate and if there are any subtle nuances. Do they have experience in that area? What can they bring to the table and how can they strengthen your business?

You now need to decide whether the advantages of being VAT registered outweigh the disadvantages.

Should I register for VAT as a sole trader?

You must register if:

• Your total VAT taxable turnover for the last 12 months was over £85,000 (the VAT threshold).
• You expect your turnover to go over £85,000 in the next 30 days.

You must also register (regardless of VAT taxable turnover) if all the following are true:

• You’re based outside the UK.
• Your business is based outside the UK.
• You supply any goods or services to the UK (or expect to in the next 30 days).

You can choose to register for VAT if your turnover is less than £85,000 (‘voluntary registration’).

You must pay HMRC any VAT you owe from the date they register you.

If everything you sell is exempt from VAT, you do not have to register for VAT.

You must register if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000.

You must register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.

Example

Between 10 July 2019 and 9 July 2020 your VAT taxable turnover is £100,000. That’s the first time it has gone over the VAT threshold. You must register by 30 August 2020. Your effective date of registration is 1 September 2020.

You must register if you realise that your annual total VAT taxable turnover is going to go over the £85,000 threshold in the next 30 days.

You must register by the end of those 30 days. Your effective date of registration is the date you realised, not the date your turnover went over the threshold.

Example

On 1 May, you arrange a £100,000 contract to provide services. You’ll be paid at the end of May. You must register by 30 May. Your effective date of registration will be 1 May.

The benefits of being VAT registered sole trader

The benefits of being VAT registered as a sole trader are the same as those we’ve already highlighted in the pros and cons section in the first section of this guide.

Are you worried about going VAT registered?

If you have made it this far through our pros and cons of being VAT registered, you are probably even more worried than before. 

Sorry.

The brutal reality is that being a small business owner is very hard. You need to wear many hats and attempt to get it right more often or not.

However, you don’t need to struggle with everything, you are not alone. On benefit to being VAT registered is that there are more than 70,000 bookkeepers and accountants in the UK can assist you.

It doesn’t have to be any harder than you want to make it and you certainly do not need to waste valuable time worrying about being VAT registered. A bit of research and a couple of conversations should be what it all takes to put your mind at rest.

Reading this guide to the pros and cons of being VAT registered is a great starting point, but it is no substitute for speaking to an expert in the field who can answer questions and explain the downsides specific to your circumstances.

Did you know? There are currently reports of VAT registration delays so the sooner you register, the better.

VAT registration threshold

The VAT registration and deregistration thresholds will not change for 2 years from 1 April 2022. The taxable turnover threshold, which determines whether a person must be registered for VAT, will remain at £85,000 until 31 March 2024.

Frequently asked questions on the pros and cons of being VAT registered

What are the downsides of being VAT registered?

Being VAT registered can impact the amount of bookkeeping and recording keeping your business must complete. It can lead to cash flow problems around pinch points in the quarter if a VAT payment is due.

Not filing returns and making payments on time can lead to penalties and surcharges and possibly even an HMRC inspection.

You must comply with lots of rules and regulations which may require you to employ a bookkeeper or accountant adding additional costs to business operations.

Is it better to be VAT registered?

If you are asking that question, it would imply that we are talking about VAT being a voluntary decision. That being the case the arguments for being VAT registered are as follows:

• Appearance of being bigger than you are, potentially winning contracts you may miss out on.
• Discipline of having to keep your books and records up to date so meet the VAT filing deadlines.
• More organised by having to ensure you are keeping accurate books and records to avoid falling foul of the VAT regulations.

Are you worse off being VAT registered?

From a purely financial point of view, you cannot be worse off being VAT registered provided you account for VAT on your purchases and sales correctly. 

VAT should not impact your business performance as it is simply a mechanism for HMRC to collect taxes. You are just acting as the middleman.

VAT does not form part of your accounting records. The items you see in your profit and loss report and balance sheet are net of VAT.

If you are looking at it from a resource and hassle point of view, then I think it would be fair to say that being VAT registered brings a lot of responsibilities and duties that you could do without.

Can you make money from being VAT registered?

VAT is a mechanism for HMRC to claim VAT from the end customer. As a VAT registered business, you are simply acting as the collection vehicle for that cash. 

In the ordinary process of being registered for VAT, you cannot make money from being VAT registered unless you are doing something illegal which we would never advise. Remember you are being watched by ‘Connect’.

The only non-illegal avenue we are aware of that could give you a benefit is if you are operating a business small enough to be on the Flat Rate Scheme.

This is where HMRC apply a fixed percentage to be reclaimed against expenses depending on the industry you operate. Depending on the type of goods and services you purchase and whether you have VAT to reclaim there can be a slight advantage to the business owner.

Conclusion

There are a lot of business factors to take into consideration when deciding whether to be VAT registered or not. Some of those factors bring advantages and other disadvantages. 

If you are above the VAT threshold that decision is taken out of your hands. If you are looking to register voluntarily you need to navigate your way through the various options to see what is best for your business.

The thousands of pages of VAT legislation, rules and exceptions to the rules make this complex for most small business owners.

Whilst there is the potential of HMRC investigations from getting things wrong being VAT registered may also help bring good process and rigour to your business, help you keep more organised, and up to date and look at your financial position more frequently. 

If this all seems too much and you know your time would be better spent servicing other areas of your business this is where software, bookkeepers and accountants come into their own.

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