Voluntary VAT registration: pros, cons and when it makes sense for a small business

The VAT registration threshold is £90,000 of taxable turnover in any rolling 12 months. Below that, registration is optional. Many new businesses assume that staying unregistered is always better, because VAT looks like an extra burden. Others register straight away because it looks more established. Neither instinct is reliable. Whether voluntary registration helps depends on who your customers are and how much VAT you pay on your own costs. This guide sets out the pros and cons and shows how to test the answer with real numbers.

What voluntary registration means

If you register voluntarily, you charge VAT on your taxable sales at the appropriate rate (usually 20%), reclaim VAT on business purchases and file VAT returns, normally quarterly, under Making Tax Digital for VAT. HMRC will allow you to register even with very small turnover, as long as you make, or intend to make, taxable supplies. Read our VAT guide for small businesses for the foundations.

The advantages

1. Reclaiming VAT on costs

This is the main benefit. If you buy equipment, software, stock, materials or services with VAT on them, you can reclaim that VAT once registered. For a business with heavy costs, such as a start-up buying equipment or a trader buying stock, the cash back can be significant. You can also reclaim VAT on some pre-registration purchases: goods bought within four years before registration that you still hold, and services bought within six months. Keep the invoices.

2. Customers who can reclaim VAT do not mind

If your customers are VAT-registered businesses, they get the VAT back, so a price plus VAT costs them the same as before. You keep your net price. For these customers, registration is nearly free of consequence to them and beneficial to you.

3. Credibility

Some larger customers expect suppliers to be VAT registered, and a VAT number on an invoice signals an established business. This is a soft benefit, but it matters in some trades.

4. Smoother growth

Registering early avoids a scramble when the compulsory threshold approaches, and gives you time to learn the process in a smaller business.

The disadvantages

1. Higher prices to non-registered customers

If your customers are consumers or businesses that cannot reclaim VAT, such as many small unregistered sole traders, charity-like organisations and the public, then the VAT is a real extra cost. You must either raise prices by 20% or absorb the VAT and reduce your own income.

2. Admin and cost

Registration means VAT invoices, a VAT account, quarterly returns, digital records and compatible software. That may mean paying for software or bookkeeping time. See Making Tax Digital for VAT checklist and VAT bookkeeping.

5. Cash flow risk

VAT you charge is held for HMRC. If you spend it, you will face a shortfall when the return is due. Late filing and payment attract penalties. See VAT penalties and late filing.

6. It is hard to undo gracefully

You can deregister if your turnover falls below the deregistration threshold (£88,000), but you may owe VAT on stock and assets you still hold. See closing a sole trader business for a related example.

A worked comparison

Two businesses each have £40,000 of annual sales before VAT and £8,000 of costs before VAT (so £1,600 of VAT on costs).

Business A: sells to VAT-registered companies.

• Unregistered: sales £40,000 and costs £9,600 (including irrecoverable VAT), profit £30,400.
• Registered: charges £40,000 + £8,000 VAT. Customers reclaim the VAT. Costs net £8,000, with £1,600 VAT reclaimed. Profit £32,000.
• Gain from registering: £1,600 a year, minus the cost of software and admin.

Business B: sells to the public.

• Unregistered: prices are £40,000 including everything. Costs are £9,600. Profit £30,400.
• Registered: if the public price stays at £40,000 including VAT, net sales are £33,333 and VAT to pay is £6,667. Costs are £8,000 net. Profit £25,333.
• Loss from registering: about £5,067 a year, unless prices can rise by 20%.

The same rule applied to two different customer bases gives opposite answers. This is why you should look at who pays you.

Schemes that can help

Small businesses may be eligible for simplified schemes after registering:

• Flat Rate Scheme: pay a fixed percentage of VAT-inclusive turnover and do not reclaim most input VAT. See VAT flat rate scheme explained.
• Cash accounting: account for VAT when you are paid and when you pay. See VAT cash accounting scheme explained.
• Annual accounting: one return a year with interim payments. See VAT annual accounting scheme.

When voluntary registration usually makes sense

• You sell mainly to VAT-registered businesses.
• You have large start-up costs with VAT, such as equipment or a vehicle.
• You sell zero-rated goods or services, where you charge no VAT but can reclaim input VAT.
• You expect to pass £90,000 soon.
• A key customer requires it.

When to hold off

• You sell mainly to consumers and cannot raise prices.
• Your costs are low and have little VAT.
• Turnover is small and the admin would outweigh the benefit.
• You do not have a way to set aside the VAT you collect.

How to register and what happens next

Register online through GOV.UK with your business details, bank account and expected turnover. HMRC issues a VAT number and a registration date. From that date you must:

1. Issue proper VAT invoices. See VAT invoice requirements.
2. Keep digital records and use MTD-compatible software.
3. File returns and pay on time.
4. Account for VAT correctly on each sale and purchase.
5. Decide whether to use a VAT scheme.

You can ask for a registration date in the past only in limited cases. Normally you choose a date at or after the application.

Questions to ask yourself before you register

• What share of my sales goes to VAT-registered customers? Above about 70%, registering rarely hurts.
• How much VAT will I pay on costs in the next twelve months? If it is a few hundred pounds, the benefit may not cover the admin. If it is several thousand, it probably will.
• Could I raise my prices by 20% for consumers without losing the sale?
• Am I likely to pass £90,000 within a year or two? If so, registering a little early is cheap practice.
• Do I have the discipline to set VAT aside every week?
• Do I want a bookkeeper to handle returns, and have I budgeted for it?

Write down your answers and revisit them each year. The best choice changes as your customer mix and costs change.

Mistakes to avoid

1. Registering without checking who your customers are.
2. Forgetting to adjust prices.
3. Spending the VAT.
4. Not claiming pre-registration VAT.
5. Missing the first return.
6. Using the wrong rate on sales.
7. Not keeping VAT invoices for purchases.

Support

Our VAT bookkeeping service handles registration, records and returns from a flat £15 an hour. See the instant quote and our VAT calculator.

Frequently asked questions

Can I register for VAT if my turnover is under £90,000?

Yes. Registration is voluntary below the threshold, as long as you make or intend to make taxable supplies.

Can I reclaim VAT from before I registered?

Often yes: VAT on goods you still hold bought within four years, and on services within six months, provided you have invoices.

What is the deregistration threshold?

Currently £88,000. If your expected turnover for the next 12 months is below it, you can ask to deregister.

Will registration make me look more professional?

It can with some customers, but it should not be the main reason. Check the numbers.

Can you check whether VAT registration suits me?

Yes. Ask for a free health check.