What Are the Advantages and Disadvantages of Being VAT Registered

Value Added Tax (VAT) registration is an important consideration for businesses of all sizes. Understanding the benefits and drawbacks can help business owners make informed decisions about whether VAT registration is the right move for their company. Below, we explore the key advantages and disadvantages of being VAT registered.

Advantages of Being VAT Registered

Improved Business Credibility

It signals to customers and suppliers that you are a legitimate, established company, which can be particularly beneficial when bidding for contracts or seeking new clients.

Reclaiming VAT on Purchases

Once registered, businesses can reclaim the VAT paid on business-related goods and services. This can result in significant cost savings, particularly for businesses with substantial expenditures.

Avoiding Penalties

If your business’s turnover exceeds the VAT threshold (currently £90,000), registration is mandatory. Registering voluntarily before reaching this threshold can help you avoid potential fines and penalties for late registration.

Enhanced Cash Flow Management

VAT-registered businesses can potentially improve their cash flow management by utilising different VAT schemes. For instance, the Flat Rate Scheme allows businesses to pay a fixed percentage of their turnover as VAT, simplifying the accounting process.

Competitive Advantage

Being VAT registered can provide a competitive edge, especially if your clients are also VAT registered businesses. They can reclaim the VAT you charge, making your services more appealing compared to non-VAT registered competitors.

Eligibility for VAT Schemes

VAT registration opens the door to various VAT schemes tailored to different business needs. These schemes, such as the Cash Accounting Scheme or Annual Accounting Scheme, can simplify VAT accounting and provide financial benefits.

 

Disadvantages of Being VAT Registered

Increased Administrative Burden

VAT registration requires maintaining detailed records of all sales and purchases to ensure accurate VAT reporting. This increased administrative workload can be time-consuming and may require additional resources or accounting software.

Potential Cash Flow Issues

While VAT registration allows you to reclaim VAT on purchases, it also means you must charge VAT on your sales. This can lead to cash flow challenges, especially if there are delays in receiving payments from customers.

Higher Prices for Non-VAT Registered Customers

Charging VAT on your products or services may increase prices for customers who are not VAT registered, potentially making your offerings less competitive in the consumer market.

Regular VAT Returns

VAT-registered businesses must submit regular VAT returns (usually quarterly). These returns require accurate and timely completion, adding to the administrative burden and necessitating careful financial planning.

Complex VAT Rules

Navigating the complexities of VAT rules and regulations can be challenging. Mistakes in VAT calculations or reporting can lead to costly penalties and interest charges from tax authorities.

 

Deciding whether to become VAT registered involves weighing the advantages against the disadvantages. For many businesses, the benefits outweigh the drawbacks. However, each business is unique, and it’s essential to consider your specific circumstances to make the best decision for your company. Whether VAT registration is advantageous or not depends largely on your business’s size, customer base, and growth plans. However, if the administrative load and risk of errors are an issue, a bookkeeper can take this burden off you. In fact, a bookkeeper can help businesses with their VAT and prove a cost-effective solution.