Should I Voluntarily Register for VAT?

As a freelancer or contractor, navigating Value Added Tax (VAT) may seem unfamiliar, complex or daunting - but that needn't be the case.

In this article, we'll explore the advantages and key considerations of VAT registration, providing you with the knowledge to make an informed decision. It could even save you a fortune in tax - let’s begin!

What is VAT and How Does it Work?

Before diving into whether to register for VAT voluntarily, let's clarify what VAT actually is. 

VAT stands for Value Added Tax, which is a tax charged on most goods and services within the UK. The current standard rate of VAT is 20%. This is charged on top of the price of most goods and services provided by VAT businesses registered for VAT in the UK. 

Businesses registered for VAT must charge VAT on the selling price of their goods and services. On the flip side, these VAT registered businesses can recover the VAT they've paid on the goods and services they've bought - so in effect VAT is not a cost on these businesses. 

Conversely, if a business is not VAT registered, it will not charge VAT to their customers and is unable to recover any VAT paid. Therefore, the cost of VAT is ultimately borne by consumers or businesses that are not VAT registered as they are unable to reclaim any VAT they’ve paid. 

Because of being able to reclaim the cost of VAT it may ultimately be financially beneficial to register for VAT. We address this below, but first let’s look at when you must legally register for VAT. 

When must you register for VAT?

By law, a business must register for VAT when its taxable turnover (total revenue, not just profit) over the past 12 months exceeds the VAT registration threshold of £90,000 (for the 2024/25 tax year), or if it's expected to surpass this threshold within the next 30 days.

However VAT registration can often be beneficial for businesses as we explore below. 

What Are The Benefits of Voluntary VAT Registration

1. Reclaiming VAT on Future Expenses:

Being VAT registered means you can claim back the VAT that you pay on goods and services where VAT is charged. This is a big deal, and over the course of a year can quickly add up to potentially save you hundreds, and possibly even thousands in tax. 

• For example: If you buy a new laptop for £2,400 pounds including VAT and have other expenses for £120 a month (where VAT is charged), being VAT registered means you can reclaim £640 of VAT on this. 
• In other words the laptop only costs you £2000 ex VAT and your monthly expenses are now only £100pm ex VAT. That’s a big tax saving you can immediately make by being VAT registered. 

If you’re on the standard rate VAT scheme, you’ll be able to effectively save VAT on all future expenses, not bad right? And it gets even better! 

2. Reclaiming VAT on Past Expenses

When you register for VAT you can reclaim VAT on expenses you’ve already incurred!

• You can reclaim VAT on ‘goods’ bought up to four years before registration, and ‘services’ bought up to six months before registration provided they’re for your current business. 
• Goods are physical items such as laptops, cameras or mobile phones. Whereas services are intangibles such as software, marketing or accounting for example. 

Backdated VAT claims can equate to huge savings - especially if you’ve bought expensive equipment and services that had VAT charged on them. 

To claim this VAT back, you need to complete a ‘backdated VAT claim’ which Mighty makes incredibly easy to do.  

3. Enhancing Your Business Image:

Rightly or wrongly, being VAT-registered can make your business look more legitimate.

• Due to the £90,000 VAT threshold it is relatively common for people to view VAT registered businesses as larger and more established. This VAT registration effectively disguises your income, as it won't be known if you have voluntarily registered or it was mandatory due to your turnover, and often, businesses will assume the latter! 
• By registering for VAT and getting a VAT number, you give potential customers the impression of being a larger business which can be reassuring to prospective customers who may be nervous (or even unwilling!) to work with smaller businesses. 

4. It forces you to keep your records up-to date:

VAT registered businesses must complete a VAT return once a quarter - don’t worry, it’s much easier than it sounds as bookkeeping software like Mighty will do it all for you. 

• To complete a VAT return you must make sure your bookkeeping is up-to-date each quarter. 
• This ensures your finances stay up-to-date and accurate - so you always know exactly how much money you’re making and how much tax you owe.
• Conversely, non-VAT registered businesses often wait until the end of the year to ‘complete their books’ and are often hit with a complete surprise of how much tax they owe, and how much they really made. 

What are the disadvantages of VAT Registration?

There are two main disadvantages of VAT registration, however neither may apply to you. 

1. Increased Admin

VAT registered businesses are required to submit a VAT return each quarter. While this task might seem daunting, it doesn't have to be with user-friendly software like Mighty.

• Completing VAT return manually on your own can be confusing, and if you miss the filing deadline, HMRC may levy fines. Fortunately, software such as Mighty streamlines the process and makes it incredibly easy. 
• With Mighty, your VAT calculations are automated, and submissions are made directly to HMRC, ensuring everything is correctly filed on time.
• Mighty provides clear VAT deadlines on your dashboard, sends automated email reminders, and offers first class support whenever you need it.
  

2. Increased Prices: 

If your customers aren't VAT registered, adding VAT to your sales invoices will instantly make your prices appear 20% higher. This is because they cannot claim back the 20% VAT you will add to their invoice.

• This is only a disadvantage if your customers are consumers or micro-businesses that are not VAT registered. 
• However if you work with VAT registered businesses, they will be able to reclaim the VAT you have charged them. This means that there is no ‘real’ increase in price to them and therefore no negative effect to your business. 

Examples: 

Example 1: If you’re a personal trainer charging individual consumers £80 ph, registering for VAT means you’ll now have to charge £96 ph as you now must charge an added £16 of VAT at 20%. This added cost to your clients may make you less competitive as they cannot reclaim the VAT.

Example 2: If you’re an IT contractor charging £500 a day to a large agency (who is VAT registered), you will now have to charge £600 pd, with an added £100 of VAT at 20%. However, your client will be able to reclaim the VAT you have charged them, so it is of no added cost to them. 

Making the Right Choice for Your Business

The decision to voluntarily register for VAT hinges on a careful cost-benefit analysis tailored to your specific circumstances. The admin of VAT shouldn’t be the deciding factor, the numbers really should. 

As a contractor or freelancer, consider your client base. Is most of your income from VAT-registered businesses? If all of your clients are VAT registered businesses, it is likely you’ll benefit from VAT registration. Conversely if you work mainly with consumers, you must consider if your clients can bear the additional VAT on your prices. 

For instance, a videographer who works with other businesses and purchases expensive equipment might benefit significantly from reclaiming VAT on those purchases. In contrast, a private therapist whose clients are individuals might find the added VAT to be a disadvantage.

How do you register for VAT?

If you believe you'd benefit from VAT registration you can register directly with HMRC here: https://www.gov.uk/register-for-vat/how-register-for-vat

The whole process should take you no longer than 10 minutes, with HMRC's portal guiding you each step of the way.

Conclusion: Balancing Pros and Cons

Ultimately, whether to voluntarily register for VAT depends on a balance of factors, from your clients' profiles and your typical expenses, to the image you wish to project and your readiness to manage additional administrative tasks. If you’re not sure if VAT registration is for you, you should speak with your accountant or book a call with a Mighty accountant here. 

Remember, if you're looking for a seamless way to manage your accounting and VAT responsibilities, Mighty offers an all-in-one simple, low cost solution that's built for freelancers and contractors like you. Our expert team is always at hand to help you navigate tax and accounting, ensuring that your limited company is not just HMRC compliant but thrives and makes the most of its money.