Why and when to register for VAT: UK business guide

Once you reach a certain size, paying value-added tax (VAT) on certain business purchases is a standard part of running your company. However, as a VAT-registered business you do have the ability to reclaim the VAT on some of these essential expenses. 

But when does a company need to register for VAT? And what must a business do to register for VAT and begin collecting and reclaiming this tax? 

Let’s take a look at the rules around why and when to register for VAT.

What does VAT mean for your business?

Value Added Tax – or VAT as it’s more commonly known – is a consumption tax that’s charged on specific goods and services. 

When customers make a purchase from a VAT-registered business, it’s your company's responsibility to add 20% VAT onto that sale price. You then collect that VAT and pay it to His Majesty’s Revenue & Customs (HMRC) at a later date.

If you make business purchases from another VAT-registered business, your company will also need to pay VAT at 20%. The difference is that you can claim back that VAT element from HMRC, reducing the overall cost of this expense. 

Paying your collected VAT, and claiming your VAT rebate, is usually done on a quarterly basis through the submission of a VAT return to HMRC. 

When do I have to register for VAT in the UK?

Registering for VAT is compulsory for most UK businesses once your taxable turnover for the past 12 months passes a threshold of £90,000. 

Once turnover reaches that threshold, you must become VAT registered. You do have the option of registering before reaching this threshold, but this will usually be because there’s a tax advantage to being able to make VAT claims against expenses.

How to check if you’re approaching the VAT registration threshold

As the business owner, It’s your responsibility to be aware of when you’re nearing the £90k VAT registration threshold. This means keeping tabs on the company’s overall income levels and being sure to register as soon as you reach the threshold.

To make this easier:

• Monitor your rolling turnover monthly: it’s good practice to monitor your income and revenue levels and to flag up when you’re nearing the threshold. Keeping tabs on this revenue number should become second nature.
• Use accounting software to track VAT-taxable sales: Cloud accounting solutions, like Xero, QuickBooks or Sage Cloud, give you the tools to track and review your VAT sales and turnover. This makes it easier to know when you’re approaching the threshold, with plenty of time to take action.
• Avoid waiting until HMRC contacts you: register proactively rather than waiting for HMRC to get in touch. Penalties will be charged for late registration. These penalties vary from 5% to 15% of the VAT-able amount, with a minimum penalty of £50 for a late registration. 

Benefits and drawbacks of voluntary VAT registration

You can apply for voluntary registration before turnover reaches the £90k threshold.

Volunteering to register for VAT is usually done because there’s a tax benefit in doing so. But there are pros and cons to this approach.  

Benefits of voluntary registration

A major benefit of registering early is that you can reclaim the VAT spent on essential business purchases. With VAT being charged at 20% of the retail sales price, reclaiming this VAT can have a significantly positive impact on cash flow. 

Being a VAT-registered company also improves your credibility as a business. Your brand will be perceived as more professional and other VAT-registered businesses will be keen to trade with you – knowing that they can reclaim the VAT portion of your bill.

Drawbacks of voluntary registration 

On the flipside, being VAT-registered does result in the added financial admin of increased record-keeping, and the completion and filing of quarterly VAT returns. Deciding whether to register comes down to whether the increased admin burden is outweighed by the cash flow benefit of claiming back your VAT-able expenses. 

May benefit B2B businesses more than B2C

For VAT-registered business-to-business (B2B) customers, the VAT charged by a supplier is reclaimable, making it a neutral cost. This means a VAT-registered B2B business remains competitively priced compared to non-registered rivals for these customers, while also benefiting from reclaiming their own input VAT.

Does VAT registration mean extra paperwork?

Yes, if you register for VAT, your business will be required to collect VAT from customers, keep detailed records and submit this VAT to HMRC. As part of this quarterly return, you can also claim back any VATable expenses.

This will result in an increased amount of bookkeeping and financial admin. So it’s advisable to increase your admin resources to cover these extra tasks. 

Step-by-step guide to registering for VAT easily

Once your taxable turnover begins approaching the magic £90k, it’s time to contact HMRC and register the company for VAT.

With HMRC on the pathway to a fully digital service via the Making Tax Digital for VAT (MTD for VAT) initiative, the registration process is all carried out online. 

• Apply online via HMRC: Head to the VAT registration page on the HMRC site and make sure you have the following items before starting the process:

You’ll need:

• your company registration number
• your business’s bank account details
• your Unique Taxpayer Reference (UTR)
• details of your annual turnover
• an estimate of your taxable turnover for the next 12 months

You will also need information about:

• your Self Assessment
• your Corporation Tax
• Pay As You Earn (PAYE)

• Set up VAT online account: Using your company registration number and UTR, set up a VAT account for the business. This will create a VAT number that’s your unique identifier for all VAT submissions, claims and tax enquiries.
• Start charging VAT from your registration date: Once you’re registered and have an account and VAT number, you can add this VAT number to your sales invoices and start charging 20% VAT on your sales. 
• Use MTD-compatible software for your VAT returns: A key requirement of MTD for VAT is to use MTD-compatible accounting software to record your VAT sales data and format your VAT returns. Most modern cloud accounting platforms will have MTD for VAT templates that make it easier to populate and submit these returns to your tax agent, or direct to HMRC.

How VAT registration affects pricing and customers

As a business owner, becoming VAT-registered has several benefits. But it can also have an impact on your pricing and the potential attraction that your products and/or services have to price-conscious customers.

Here are a few of the potential outcomes of becoming VAT-registered.

You may need to increase your prices to cover VAT:

It’s usual practice to add 20% to your usual pre-VAT sale price. If you don’t do this, you’ll lose 20% of your sales revenue to VAT, bringing down your margins and affecting your overall revenue and the profitability of the business.

Your customers who are VAT-registered may reclaim VAT you charge:

Adding 20% to your prices may sound like a dangerous move – customers are price sensitive and don’t want to pay over the odds. However, if you’re a B2B business then your VAT-registered business clients can claim back this VAT element when they submit their own quarterly VAT return. 

As such, the extra 20% they are paying is a neutral cost that will be claimed back each quarter, keeping your prices competitive.

Non-VAT registered customers (B2C) bear full VAT cost:

For business-to-consumer (B2C) businesses, your customers won’t be able to reclaim their VAT. So, you’ll need to find a balance when it comes to setting your prices. Too high and consumers won’t bear the cost of buying your product or service. Too low and your margins won’t be high enough to make the product profitable. 

Reviewing your prices will be an ongoing balancing act that allows you to remain competitive in the market, while still driving the revenue you need as a business. 

Can registering for VAT help you secure a business loan?

Being a VAT-registered business brings with it the kudos of being a more professional and viable enterprise. It shows the business has experienced significant growth and has stability in its turnover – both signs that credit rating agencies, banks and specialist business lenders will be looking for in a potential borrower.

For lenders like iwoca, having VAT data to assess helps give an overview of your company’s trading activity, revenue potential and cash-flow potential. With organised VAT records to share with lenders, your loan applications process should become smoother – and more likely to be successful.

Can VAT registration affect my chances of getting a business loan?

Yes, getting registered for VAT can have a positive impact on your chances of accessing funding from banks and online lenders. 

Being VAT-registered provides evidence of the company’s ability to generate sales and revenue, while managing the process of collecting and submitting VAT to HMRC – all good signs of the kinds of business performance that lenders will be looking for. 

Improving cash flow by effectively managing your VAT

One of the key commitments you make as a VAT-registered business is that you’ll collect VAT on your sales and pay this tax to HMRC each quarter.

Having the necessary cash flow to do this can be challenging, especially if you’re experiencing late payments from customers, or have overspent on operational expenses. Managing cash flow at this time can be difficult and may mean looking around for VAT loans and additional funding to ease your cash flow issues.

Think about: 

• Using invoice financing to fill the cash flow gap: If you’re waiting for customer payments that are affecting the company’s VAT cash flow, invoice financing is a great short-term solution for balancing out your cash flow. Sell your unpaid invoices to the finance provider and quickly access additional cash to pay your VAT bill.
• Take out a short-term flexible loan to inject capital: Flexible small business loans are another option for filling the VAT cash-flow gap. An iwoca Flexi-Loan allows you to borrow the money needed to pay your VAT bill and have the funds in your business bank account in as quick as 2 minutes 37 seconds! 
• Agreeing to an HMRC payment plan: If you really can’t pay the VAT bill, it;’s worth speaking to HMRC to agree on a VAT deferral scheme or payment plan.  If you owe £100,000 or less, you can set up a payment plan, where the VAT debt is repaid over the next 12 months.
• Automate VAT tracking with your cloud accounting software: Cloud accounting software can automate your VAT process by digitally recording transactions, applying the correct rates and calculating real-time liabilities. Features like direct bank feeds, OCR for receipts and digital submissions to HMRC ensure you’re compliant with MTD for VAT – giving you the best possible overview of your VAT and cash-flow position.

iwoca: the simple way to manage VAT cash flow gaps

If late payments are making it difficult to cover your VAT liabilities, why not take out an iwoca Small Business Loan to inject some much-needed capital into the business?

Instead of facing HMRC penalties for missing your VAT payment deadline, take out a short-term loan and repay it as soon as cash flow allows.

• Borrow from £1,000 to £1 million
• 24 hours to get a decision
• Repay early with no fees
• From 1 day to 60 months

Apply for an iwoca Flexi-Loan