Is Voluntary VAT Registration Right for Your Business?

Why Some Businesses Choose to Register Before They Have To

While many small businesses aim to stay under the VAT registration threshold (currently £90,000) to avoid administrative burden and potential price increases for customers, voluntarily registering for VAT can come with surprising advantages. For some, it’s a smart strategic move that signals growth, boosts credibility, and opens doors to wider opportunities.

Even if you haven’t reached the threshold, registering for VAT can help you appear more established to customers, partners, and suppliers—a valuable perception in competitive industries.

Unlocking Financial Benefits: Claiming Pre-Registration VAT

One of the main advantages of early registration is the ability to reclaim VAT paid on certain goods and services before registering.

• Goods: If you purchase stock or equipment up to four years before registering, and those goods are either still in use or held in stock, you may be able to reclaim the input VAT, provided the business was operational during that time and proper VAT invoices are available.
• Services: VAT on services bought up to six months before registration can also be reclaimed, as long as those services helped establish the business and the VAT wasn’t passed on to clients. A common example includes early website design or marketing costs.

This reclaim opportunity can provide a cash boost during the early stages of a business when funds are often tight.

Enhancing Cash Flow

VAT-registered businesses can reclaim the VAT they pay on purchases from other VAT-registered suppliers. For businesses making large purchases or incurring substantial running costs, this can significantly improve cash flow and free up resources for growth.

Greater Appeal to Other Businesses

VAT registration may make your business more attractive to other VAT-registered entities. Since these clients can reclaim the VAT you charge them, it makes you a more seamless supplier within their accounting systems—a potential competitive edge.

Avoiding Late Registration Penalties

Accidentally exceeding the threshold without registering can lead to penalties. By registering voluntarily from the outset, you ensure compliance and reduce the risk of any surprises as your business scales up.

Potential Downsides to Consider

Of course, VAT registration isn’t without drawbacks:

• Price Sensitivity: Charging VAT means potentially increasing prices by up to 20%. For businesses selling directly to the public, this can be a disadvantage if customers are price-conscious and not able to reclaim VAT.
• Administrative Burden: Registered businesses must maintain VAT records, submit regular returns, and comply with HMRC rules, including Making Tax Digital (MTD) requirements. For some, this may require investing in new systems or professional support.

Still, the 20% VAT doesn’t always need to be passed directly onto your customers. Absorbing some or all of it could help keep your pricing competitive.

Registering as an ‘Intending Trader’

HMRC allows businesses that haven’t yet started trading to register for VAT as ‘intending traders.’ If you’re actively preparing to begin trading—perhaps purchasing supplies, developing products, or incurring setup costs—you can still register and reclaim input VAT on early expenses. This can be especially helpful in ensuring essential costs don’t fall outside the reclaim window.

Final Thoughts

Voluntary VAT registration may not suit every business, but for those with plans for growth, substantial start-up costs, or primarily B2B clients, it can offer real benefits—from cash flow relief to a more professional market presence.

Before making the decision, it’s important to weigh the pros and cons in light of your business model and client base. A professional advisor can help assess whether early VAT registration is the right move for your unique circumstances.

Partner Note:

• VAT Registration Manual (VATREG) 21300; VATREG 21550
• VAT Act 1994, Schedule 1, para 9
• HMRC: The Role of the Adjudicator