WHAT IS VAT?
Value Added Tax (VAT) is added on most of the merchandise and services provided by VAT-registered organizations in the UK, as well as certain commodities and services imported from both EU and non-EU countries. Organizations enlisted for VAT have to include VAT in the final cost of the products and services when they are being sold in the commercial and non-commercial market. After voluntarily registering a corporation for VAT, one can deregister at any point, if one concludes that despite any potential benefits, it is not justified; as long as the deregistration turnover threshold is not surpassed. Businesses registered for VAT are usually able to reclaim the VAT they have paid when purchasing products or services. Registration is necessary to reclaim VAT on anything purchased by businesses.
THE UPSIDES AND DOWNSIDES OF VAT REGISTRATION
The VAT threshold gives an impression of being a hefty amount of income, but it is essential to realize that this value includes all the money generated from the sales, not just the profit, therefore, many businesses stay under this threshold of registration. Consequently, numerous private companies and limited organizations are legally required to register for VAT.
Small scale enterprises that may not meet the standard threshold for VAT can gain numerous benefits by voluntary VAT registration. Voluntary VAT registration also has some of potential drawbacks, to be specific, possibly greater expense and extra administrative work.
THE ADVANTAGES OF VOLUNTARY VAT REGISTRATION
- VAT applies to the selling cost of all the commodities and services sold and is known as the output tax. It can also be reclaimed on most merchandise or services bought from different organizations and is known as input tax in this scenario. This reclamation is particularly beneficial when a standard rated product is purchased but zero-rated product is sold and it fulfils the eligibility criteria for VAT refunds from HMRC.
- VAT registration disguises the actual size of a business and make small scale companies appear bigger and more established which can attract investors and clientele. It caters the presumption that the business turnover is more than £85,000 which may seem impressive and appealing to lenders and suppliers too. On the contrary, no VAT registration attests to the fact that the turnover is lower than the threshold.
- Registering for VAT adds further credibility to the business in the eyes of other firms, clients and business associates. Especially those in the finance sector.
- Greater scope and feasibility of sourcing supplies, especially from those deeming UK VAT registration necessary when dealing with businesses.
- A VAT Identification Number is allotted by HMRC to all the businesses it registers for VAT. This number can be displayed on invoices, websites, letterheads, stationary or any other correspondence.
- HMRC can backdate voluntary registration for up to 4 years if sufficient pertinent evidence is presented. This means that a business can reclaim VAT paid on equipment that it is currently using.
THE DISADVANTAGES OF VOLUNTARY VAT REGISTRATION
- If one is selling a product to consumers who are not VAT registered, then one can price the product out of the market or be less competitive. It is of utmost importance that VAT does not hamper the allure of the products for the consumer.
- Businesses could end up with an excessive VAT bill from HMRC if their output tax is more than their input tax, as they would have to pay the difference. This generally occurs when VAT generated by products sold is more than that of the merchandise purchased from different organizations.
- It brings about extra paperwork in the form of VAT receipts, invoices, accounting records, quarterly returns, all of which should be filed and maintained. An added burden of administration maintaining records and paperwork is also an unavoidable consequence of VAT registration.
- Filing monthly or quarterly VAT return to HMRC can be a hassle if no accountant is hired. Raising VAT invoices for each sale can also seem time consuming.
- One can incur penalties for non-filing or late filing of VAT returns.
- If it turns out that voluntary registration is not the right path or VAT is not applicable anymore, de-registration can be applied for if most of the business’ taxable supplies are zero-rated, or the turnover threshold has not been surpassed nor is likely to in the upcoming 1 year. Informing HMRC the date of conclusion of a business’ VAT registration is essential and VAT should be charged and records should be maintained till HMRC confirms VAT cessation.
HOW TO REGISTER FOR VAT?Registration for VAT can be completed online by signing up for HMRC Online Services or the Government Gateway. The application process at HMRC takes 14 days or more, during which record and account keeping should be ensured along with bookkeeping of all the receipts and invoices.
VAT cannot be charged or shown on the invoices unless HMRC sends out a VAT identification number but the selling price can be adjusted according to the VAT applicable.
It is advisable to hire an accountancy expert to submit quarterly VAT returns online and handle VAT related affairs. Filing VAT Returns and submitting VAT payment usually falls due on the same date. SMEs consultants in the UK are recommended to provide accountancy and VAT advice along with handling tasks like registration of VAT with HMRC, sending out VAT payments electronically. completing VAT Returns online after every 3 months, delivering VAT Returns to HMRC within 1 month and 1 week after the conclusion of VAT period.
Making Tax Digital (MTD) requires VAT returns to be submitted electronically via an online accounting system. Premier UK Business has their own compliant accounting system which meets the requirements of MTD.