Pros and Cons of Being VAT Registered
Incorporating VAT-registered companies is the most important step on the financial development of your company. There are a lot of benefits to it, like claiming VAT back and increasing credibility, the registration of VAT has its own obligations and problems. This guide will explain the pros and cons to aid you in making an informed choice.
Understanding VAT Registration
VAT (Value Tax on Added Value) is a consumption tax that is imposed on the majority of goods and services. Many countries require companies have to be registered once their turnover surpasses a specific threshold.
Why Register?
- You tax VAT on the sale
- You are able to get back tax from business costs
- The registration of VAT can enhance professional credibility as well as professionalism.
You can be able to choose to register in the event that you’re under the threshold. This is often done to recover the input VAT, or improve your image.
Financial Benefits of VAT Registration
Reclaiming VAT on Purchases
You are able to get back tax-free input on a wide range of business-related items and services, which can reduce total expenses.
Cash Flow Advantages
Reclaiming VAT can:
- Improve working capital
- Lower operating costs
- Improve cash flow, particularly in the event that VAT inputs outweigh outputs
Backdated Claims
If you sign up voluntarily and you are not a registered VAT holder, you might be able to retroactively register for VAT and reclaim VAT for previous purchases (usually within four years for products and 6 months for services within the UK).
Potential Drawbacks
Increased Administrative Burden
Registration for VAT comes with a strict set of obligations:
| Requirement | VAT-Registered Businesses Must: |
|---|---|
| Maintain accurate VAT records of the VAT | Make sure you keep receipts, invoices and tax information |
| Prepare regular VAT returns. File regular VAT | Usually, every quarter |
| Pay electronically | Pay VAT and submit returns electronically |
| Meet HMRC (or equivalent) deadlines | Beware of interest and penalties. |
Impact on Pricing Strategy
- Should be able to charge VAT on sales, which may raise prices for customers who are not VAT registered.
- It could make your products appear more expensive when compared to businesses that do not charge VAT.
- In B2B transactions, it’s typically an non-negative impact since VAT can be reclaimed.
Input Tax Claims
Pros:
- You can claim VAT back on the items or equipment that you use for your business.
- Reduce the total VAT obligation to be to be.
Cons:
- Requires accurate documentation.
- Claims should be directly related to the business activities that are tax-deductible.
- Unsatisfactory or unqualified claims can be subject to sanctions.
Effects on Cash Flow
| Pros | Cons |
|---|---|
| Reclaiming VAT reduces net expenses | Taxes paid in quarters can impede the flow of cash |
| Improves liquidity to reinvest | Unplanned decisions can lead to penalties or late payments. |
| Improves forecasting and budgeting | The delay in refunds from HMRC can impact the timeframe |
A good cash flow management system is crucial to reduce the VAT-related outflows.
Compliance and Reporting Requirements
Businesses registered with VAT must:
- Returns must be submitted quarterly (or annually under certain scheme)
- Correctly report VAT charges and Reclaim it
- Maintain records for at least six years (UK standard)
Infractions can lead to:
- Interest or fines
- Audit risk
- The loss of credibility
Impact on Business Credibility
Benefits:
- It positions you as you are a professional established business
- Larger clients typically choose to work with VAT registered companies.
- Transparency and compliance signals build trust
- Improve the negotiation power of suppliers and clients.
The display of “+VAT” on quotes/invoices may be a way of creating an impression of scale.
Considerations for Deregistration
It is beneficial to register if:
- Your revenue falls below the threshold for deregistration
- This administrative burden exceeds the financial advantages
Key Considerations:
| Pros of Deregistering | Cons of Deregistering |
|---|---|
| Reduced paper work | Inability to claim VAT on purchases |
| Simpler accounting | Can affect credibility with clients/suppliers. |
| Lower compliance obligations | It could be interpreted as an operation that is smaller |
Should You Register for VAT?
Do you ask yourself:
- Does your business’s turnover fall within or even above the threshold for VAT?
- Do your clients have the option of claiming VAT (i.e. typically B2B)?
- Does VAT registration cut costs?
- Does your company have the capacity to be able to handle the administrative burden?
The voluntary registration process is usually beneficial to small businesses as well as small businesses that have ambitions to grow especially in B2B market.
Summary: Pros and Cons at a Glance
| Pros | Cons |
|---|---|
| Tax-free business expense reimbursement | Record-keeping and reporting is complex. |
| Improve cash flow and decrease expenses | Regular VAT payments can affect the flow of cash |
| Improves the credibility of business | Non-VAT customers pay more |
| The possibility of reversing claims | A greater administrative burden and the possibility of sanctions |
| Important to handle certain customers | The risk of making pricing less than |
Frequently Asked Questions
Q: What’s the disadvantages of having a VAT registration?
A: The main drawbacks are additional administrative duties, complicated records-keeping and the possible impact on pricing.
Q: Do I need to avoid having to register for VAT?
A: Not necessarily. It is contingent on your customers’ turnover, and growth objectives. Be sure to evaluate the cost and benefits.
Q: What is the reason why a business would sign up voluntarily?
A: Reclaim VAT on expenses, increase credibility, and to work on behalf of clients that prefer VAT registered partners.
Q: Is it a problem if an organization doesn’t have VAT registration?
A: But not always. It could help small-sized businesses streamline their financial management, but it can also limit their credibility in certain markets.
Conclusion
A VAT registration could provide economic benefits and market credibility, but it also comes with new obligations. Since more than 2 million companies within the UK alone have signed up for the VAT system, it’s obvious that for a lot of businesses the benefits are greater than the cost.
Assess your company’s needs capacities, goals, and needs prior to making a choice.
