Do I need to be VAT registered? The pros and cons for businesses and tradespeople

Whether you operate as a sole trader or a limited company, you must register for VAT (Value Added Tax) when your business turnover exceeds £90,000. Some sole traders and limited company directors register before they reach this figure. So, what are the pros and cons of doing so?

Firstly – what does ‘VAT registered’ actually mean?

VAT is a sales tax that is currently set at 20% (and has been since 2011). When you register your business for VAT on gov.uk,  you’ll receive a VAT registration certificate and number, with advice on when to submit your VAT return and payment. 

Being VAT registered means a business is able to reclaim any VAT paid on company purchases (for example,  a new van or business phone) and you must charge VAT on goods or services sold to customers (for example, the cost of bricks, mortar and labour to build a brick wall). 

Pros of being VAT registered

You can opt-in for VAT registration before your business exceeds the £90,000 threshold. Doing this in good time means you avoid the rush and stress of doing it suddenly – plus, it means you have enough time to adjust your prices, quotes and invoices accordingly. 

The main pro is that you can reclaim the VAT your business pays on goods and services against the VAT charged to your clients. You can make savings over time on a variety of business purchases – including workwear, expensive machinery and items such as a work laptop or computer. You can also reclaim VAT on fuel used to and from a job, unlike non-VAT registered businesses. 

Being VAT registered may also give the impression that you’re doing well as a business, and some customers may view a VAT-registered company as more established or professional.

Cons of being VAT registered

Being VAT registered does require more admin – such as adding VAT to client invoices, managing VAT invoices and receipts, and submitting quarterly or annual VAT returns and payments.

The main con of being VAT registered is appearing more expensive to customers, as your prices will effectively increase by 20% for those who cannot reclaim the VAT (like private homeowners). However, it is also a logical opportunity to raise your prices if you felt you couldn’t before. It really depends on your business model and your typical customer base.

Do you quote for jobs alongside other non-VAT registered tradespeople? If the answer is yes, then you may not want to be VAT registered if you can avoid it. If you choose not to be VAT registered, you need to ensure your business turnover does not exceed £90,000. Remember, this figure is calculated on a rolling 12-month basis, not on your trading or tax year, so you may need to monitor your income closely if you are approaching the threshold.

If you think being VAT registered sounds like a hassle, but you are about to hit or want to exceed the £90,000 turnover, you could employ an accountant to register your business and manage your VAT returns for you. Alternatively, you could look into accounting software designed to make the process easier.

All VAT-registered businesses are required to keep digital records and use accounting software (compatible with the government’s online system) to submit VAT returns. Find out everything you need to know about Making Tax Digital.

For more advice visit: https://www.gov.uk/vat-registration

Disclaimer: This article is for guidance purposes only. Tax rules can change; we recommend consulting with a qualified accountant regarding your specific business circumstances.