Why register for vat voluntarily?

The first question that it would be perfectly fair to ask in an article suggesting that you might like to voluntarily register for VAT would be – are you stark, staring, raving mad?

Given that registering for VAT means extra administration, as well as charging your customers VAT, it might make you feel uneasy to make the change. Then from April 2022 onwards, there the need to conform to some onerous requirements for HMRC’s Making Tax Digital.

Being a tax collector on behalf of HMRC does not normally appeal to anyone. Unfortunately, life is complicated and when it comes to trade businesses considering VAT, it is particularly complicated.

There are in fact both advantages and disadvantages in registering for VAT.

Let’s start with the cons.

The disadvantages of voluntary vat registration

When you sell to residential customers and you’re registered for VAT, you can claim back the VAT on materials but you have to pass on the cost of VAT to your customers.

There are some exceptions, but we’ll ignore these for now.

Looking at an example, you might pay £1,000 for materials + VAT = £1,200, which cost you pass on. You charge £2,000 labour with VAT added only if you are VAT registered.

So, when NOT VAT registered:

• You charge £1,200 + £2,000 = £3,200 which you get paid for
• You pay £1,200 to the supplier
• As a result, you receive £2,000 net

Then, when you ARE VAT registered:

• You charge £1,200 + £2,000 + £400 VAT = £3,600 which you get paid for
• You pay HMRC £600 – £200 = £400
• You pay £1,200 to the supplier
• As a result, you receive £2,000 net

The disadvantage is that your customer gets charged an additional £400 while getting the same service while you get the same pay. That is a competitive disadvantage compared with non-VAT registered rivals.

The benefits of voluntary vat registration

The advantage to a business customer

The big advantage comes when you are selling to other businesses that are VAT registered. In this case, they will be able to claim back any VAT that they pay.

You would think that they are neutral when it comes to whether you are VAT registered, but that isn’t the case,

Let’s look at the same case as above when you are VAT registered and selling to another VAT registered business.

Firstly, the situation when you are NOT VAT registered:

• You charge £1,200 + £2,000 = £3,200 which you get paid for
• You pay £1,200 to the supplier
• So, you receive £2,000 net
• Your customer cannot claim back any VAT so they are £3,200 out of pocket.

However, when you are VAT registered:

• You charge £1,200 + £2,000 + VAT = £3,600 which you get paid for
• You pay HMRC £600 – £200 = £400
• You pay £1,200 to the supplier
• So, you receive £2,000 net
• Your customer can claim all their VAT back of £600 so they are only £3,000 out of pocket.

Your customer ends up paying less. That’s good.

Note: this example ignores the impact of the Domestic Reverse Charge (DRC) which won’t change the overall impact of VAT registration.

Under MTD, VAT registration means that you must keep computer-based records of sales and costs and submit VAT returns to HMRC electronically.

The other advantage

If you’re just starting up and you know that you’re going to quickly exceed the VAT threshold for registering, or you will mostly service VAT registered businesses, then it’s worth registering straight away.

This is because you can claim your VAT on the costs for setting up the business. HMRC will actually pay you if your VAT return shows that they should!

This will help with cashflow and profitability during your startup phase.

Other VAT considerations

This article has considered voluntary VAT registration but VAT registration becomes compulsory once your sales in any 12 month trailing period exceed £85,000.

If you really don’t want this to happen and want to put it off for as long as possible, there are three ways you may be able to do this:

• Get customers to pay directly for the materials that will be used on their job.
• Use disbursements. The Powered Now app (from my company) helps with this, but you must follow very precise rules to make it work. This is where you are “buying on behalf” of your customer which means the costs don’t have to go through your books.
• Get customers to pay your subcontractors directly. Of course, this means that you can’t make a mark-up specifically on their cost although you can incorporate the markup into your own billing. This also avoids CIS.

Decision time, are you voluntarily registering?

It seems that nowadays nothing is straight-forward when running a trade business. What seems like a simple question, should I voluntarily register for VAT? The answer, ‘no’, turns out to be much more complicated than at first sight.

Unfortunately, VAT is more complex for the trade than it is for most other industries.

Apart from the option of three schemes (accrual, cash and flat rate) that apply to all businesses, there are multiple VAT rates with all sort of rules about when they apply, including whether work is for a new build or renovation, whether the project is green and what proportion of the project falls into these different buckets.

In addition, there are special rules for Domestic Reverse Charge (DRC) which in turn overlaps with the Construction Industry Scheme (CIS), which is a barrel of laughs (not) all on its own.

The best advice is to seek the help of a qualified accountant. Do this at the very least when you are setting everything up.

Mistakes concerning VAT can be very expensive to put right, so starting off on the right foot is well worth the fee.

Fancy some more tips on paying less tax (legally)? Check out our blog!

Benjamin Dyer

Benjamin Dyer is CEO and co-founder of Powered Now. Powered Now’s mobile app aims to take the pain out of paperwork for electricians, plumbers and builders as well as other field trade businesses.

www.powerednow.com