If you are deciding whether your limited company should be VAT registered, please read our guide. It will take 15 minutes or so but has the potential to possibly save you a lot of headaches in the future if you get this decision wrong.
However, the choice of registering for VAT as a limited company will be taken out of your hands if you have reached the VAT threshold (£85,000 in 2022). Despite this, simply understanding the pros and cons of being VAT registered will help you plan and implement with confidence that you are doing the right things.
It is not uncommon to be registering a limited company for VAT in a blind panic if you didn’t know what the VAT threshold is, or your accountant didn’t tell you until it was too late… 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 even 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 it would be advantageous to be VAT registered as a limited company, here’s what you need to know.
Should I register for VAT as a limited company? Registering for VAT as a limited company can have pros and cons. It might improve your cash flow and help you win more business. Or it could complicate your business and not be right for you.
We appreciate that isn’t entirely clear. Truth is, you need to decide if the advantages to being a VAT registered limited company outweighs the disadvantages of rules, regulations, deadlines and appearing more expensive to customers.
The benefits of being a VAT registered limited company
A report from 2009 found that there are 11,520 pages of the UK tax code. That’s the longest in the world. With so many pages of tax legislation to consider there must be some great benefits for businesses… you would hope anyway!
1. Reclaim VAT
Of course, an obvious choice. Probably the most logical benefit of being VAT registered as a limited company is the ability to reclaim VAT on your purchases where applicable.
As a director of a limited company, you will now enjoy the benefits of getting back 20% of the cost of goods and services that you had previously missed out on.
You could decide 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.
Did you know? VAT registration delays are currently being reported. Here’s why.
2. Win Big
As sad as it seems there are still businesses among us who will only do business with limited companies that are VAT registered. 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 your limited company 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
Being VAT registered 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
You can 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 bit. What you have read so far is about as good as it gets… sorry.
The benefits of NOT being a VAT registered limited company
There are also benefits to your limited company not being VAT registered. To avoid duplication of the same points we have added a section on the disadvantages of being VAT registered below.
Disadvantages of being VAT registered?
1. Rules and regulations
You did not 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, 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.
2. Exceptions to the rules
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.
3. VAT Deadlines and Surcharges
Depending on the frequency of your VAT returns you have now just introduced a bunch of new deadlines into your limited company. 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% |
| 6 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.
4. Managing Cash flow
You are going to be receiving VAT on sales invoices. This has the effect of increasing the cash inflow to your business.
Wonderful you say. That is until the end of the month, quarter, or year you must pay that over to HMRC and you have not budgeted it.
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.
VAT is not your money or that of the limited company. 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
If you register your limited company 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
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.
- 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 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 and limited company money in either your time or the cost of external support.
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
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 1st April 2019 and for all other VAT registered businesses from 1st 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 triggered 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.
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.
9. Cost of hiring a bookkeeper and/or an accountant
When your limited company becomes VAT registered it requires you 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?
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 of 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.
Here’s an example
Between the 10th of July 2019 and the 9th of 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.
Here’s another 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.
Can I register for VAT if my turnover is below the threshold?
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.
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.
- If you will have VAT to reclaim on purchases in excess of any sales you will be making.
How to check if a company is VAT registered
There may be occasions when you feel the need to check if a limited company is VAT registered. This may be part of your credit checks on new customers and suppliers to protect your business against any possible VAT fraud.
If you reclaim VAT without a valid VAT number from your supplier, it could lead to HMRC rejecting your claim. You could end up footing the bill or dealing with a severe amount of admin to rectify.
A VAT registration number is a unique ID that HMRC provides to businesses when they register for VAT. In the UK VAT numbers are nine digits long and always have a prefix of GB.
You can use a free tool from HMRC to do this.
Check a UK VAT number
Use this service to check:
- If a UK VAT registration number is valid.
- The name and address of the business the number is registered to.
If you are a UK VAT-registered business, you can also use this service to prove when you checked a UK VAT number.
You will need your own VAT number to do this.
You can also call the VAT helpline on 0300 200 3700.
If you are dealing with a supplier in another EU country then its VAT number will follow a different format. HMRC provides a list of ID formats from EU member states.
You can use the EU’s VIES to check the validity of both UK and EU VAT numbers.
FAQs in relation to registering for VAT as a limited company
What are the disadvantages of registering for VAT?
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.
When should a limited company register for VAT?
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.
If you are going to exceed the threshold in the next 30 days
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 have to register by the end of that 30-day period. Your effective date of registration is the date you realised, not the date your turnover went over the threshold.
Here’s an example
On the 1st of May, you arrange a £100,000 contract to provide services. You’ll be paid at the end of May. You must register by the 30th of May. Your effective date of registration will be the 1st of May.
If you exceeded the threshold in the last 12 months
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.
Here’s an example
Between 10 July 2021 and 9 July 2022 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 2022. Your effective date of registration is 1 September 2022.
Late registration
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 you go over the threshold temporarily
You can apply for a registration ‘exception’ if your taxable turnover goes over the threshold temporarily.
Write to HM Revenue and Customs (HMRC) with evidence showing why you believe your VAT taxable turnover will not go over the deregistration threshold of £85,000 in the next 12 months.
HMRC will consider your exception and write to confirm if you get one. If not, they’ll register you for VAT.
Does it matter if a company is not VAT registered?
If a limited company is not VAT registered it cannot reclaim VAT on the purchase of any goods or services, it has bought where the company providing them is VAT registered and charged VAT. This ultimately increases the price you pay for goods and services by 20%.
You would however then charge your customers 20% VAT which would mean you are more expensive.
If everything you sell is exempt from VAT, you do not have to register for VAT. If your business is partly exempt, you may not be able to recover all your input tax. You will have to use a partial exemption method to work out how much input tax you can recover.
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.
Should my limited company be 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 account 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.
If you have made it this far through our pros and cons of being VAT registered, you are probably more worried than before.
The brutal reality is that being a small business owner is very hard. You must wear many hats and attempt to get it right more often or not.
You do not need to struggle with everything, you are not alone. There’s said to be 70,000+ bookkeepers and accountants in the UK can assist you.
It does not 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 article is a great starting point but it is no substitute for speaking to an expert in the field who can answer questions specific to your circumstances.
Conclusion
There are a lot of business factors to take into consideration when deciding whether to be VAT registered as a limited company 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.
You might also like…
- Why you need to keep business receipts for everything
- If you use a train or public transport for business, read this
- Why VAT registrations are taking so long
Image in header via https://pixabay.com/illustrations/to-register-register-keyboard-257986/
Jon has been in business since 1999, and in that time worked with more than 300 small business clients. As well as being an accountant, he is also an early adopter of tech, and has helped small businesses to leverage the power of their computer systems by creating software to automate and simplify accounting tasks.
