How Does Voluntary VAT Registration Work

If your business turnover is below the VAT registration threshold, you can still choose to register for VAT voluntarily. Voluntary registration can provide financial and reputational advantages, but it also brings added responsibilities for record keeping and reporting. Understanding how voluntary VAT registration works helps you decide whether it is right for your business. This article explains how voluntary registration operates, its benefits and drawbacks, and how to apply through HMRC.

What Is Voluntary VAT Registration

Voluntary VAT registration means choosing to register your business for VAT even though your taxable turnover is below the current compulsory threshold of £90,000.

Once registered, your business must charge VAT on taxable sales, submit VAT returns to HMRC (usually every quarter), and comply with Making Tax Digital (MTD) requirements for digital record keeping.

Although voluntary registration is optional, it can be strategically beneficial for small and growing businesses, especially those with VAT-registered clients or high business expenses.

How Voluntary VAT Registration Works

The process for voluntary registration is the same as for compulsory registration. You register online through the HMRC website by creating or logging into a Government Gateway account.

You will need to provide:

  • Your business name, address, and contact information.

  • Your Unique Taxpayer Reference (UTR).

  • Details of your business activities.

  • Your estimated taxable turnover.

  • Your bank account details.

  • The VAT accounting scheme you plan to use (standard, flat rate, or cash accounting).

Once your application is approved, HMRC will issue a VAT registration certificate that includes your VAT number and the effective date of registration. You must begin charging VAT on your taxable sales from that date.

Benefits of Voluntary VAT Registration

Voluntary registration can be advantageous in several ways, particularly for small or start-up businesses that work with other VAT-registered companies.

1. Ability to Reclaim VAT on Purchases
You can reclaim VAT on most goods and services bought for business use. This can lead to significant savings if you purchase expensive equipment, stock, or professional services.

2. Enhanced Business Credibility
Being VAT-registered can make your business appear larger and more established, which can help when dealing with corporate clients or suppliers.

3. Preparing for Future Growth
If your business is approaching the VAT threshold, registering voluntarily gives you time to adjust to the requirements before it becomes mandatory.

4. Cash Flow Benefits under Certain Schemes
Some VAT schemes, such as the Flat Rate Scheme or Cash Accounting Scheme, can improve cash flow by simplifying VAT calculations or delaying VAT payments until customers pay you.

Drawbacks of Voluntary VAT Registration

While there are clear advantages, voluntary registration also comes with additional administrative responsibilities and potential downsides.

1. Increased Administration
You must keep accurate digital records, issue VAT invoices, and file VAT returns quarterly. Non-compliance can result in penalties.

2. VAT on Sales to Non-VAT Customers
If most of your customers are individuals or small businesses not registered for VAT, adding VAT to your prices could make your products or services less competitive.

3. Cash Flow Impact
You must pay VAT to HMRC on your sales even if clients have not yet paid their invoices, unless you use the Cash Accounting Scheme, where VAT is paid only when payment is received.

4. Complexity for Small Businesses
Learning to manage VAT processes, digital submissions, and deadlines can be time-consuming, particularly for sole traders or new business owners.

Example of Voluntary VAT Registration in Practice

Suppose you run a graphic design business with annual sales of £60,000. Your clients are mostly VAT-registered companies, and you spend £10,000 a year on software, equipment, and marketing, which all include VAT.

By registering voluntarily:

  • You can reclaim VAT on your business expenses, reducing your overall costs.

  • Your clients can reclaim the VAT you charge, so your prices remain competitive.

  • You build credibility as a professional supplier to larger organisations.

However, if your clients were mostly private individuals who cannot reclaim VAT, registering might make your services more expensive compared to non-registered competitors.

Choosing a VAT Accounting Scheme

When registering voluntarily, you can choose from several VAT accounting schemes to simplify reporting and improve cash flow:

  • Standard Accounting: VAT is recorded when invoices are issued and received.

  • Cash Accounting: VAT is recorded only when money changes hands, helping manage cash flow.

  • Flat Rate Scheme: Small businesses with turnover under £150,000 can pay a fixed percentage of turnover as VAT, simplifying administration.

An accountant can help you choose the scheme that best suits your business model and cash flow needs.

Reclaiming VAT on Pre-Registration Purchases

If you register voluntarily, you may be able to reclaim VAT paid on goods or services bought before registration, provided they were for business use and you still own or use them at the time of registration.

You can reclaim VAT on:

  • Goods purchased within the last four years that you still hold.

  • Services purchased within the last six months before registration.

Keep invoices and receipts for all relevant purchases to support your claim when you submit your first VAT return.

How to Deregister from VAT

If your turnover remains below the threshold and you no longer wish to be VAT-registered, you can apply to deregister with HMRC. Deregistration may also be beneficial if your customers are mainly non-VAT-registered and you want to reduce your prices.

To deregister, you must complete the VAT7 form online through your HMRC account. Once approved, you must stop charging VAT and submit a final VAT return.

How an Accountant Can Help

Voluntary VAT registration can be beneficial, but it must be managed correctly. An accountant can:

  • Advise whether registering voluntarily is right for your business.

  • Complete the VAT registration on your behalf.

  • Help you choose the most tax-efficient VAT scheme.

  • Ensure your accounting software is MTD-compliant.

  • Manage VAT returns and ensure compliance with HMRC deadlines.

Professional advice ensures you make the most of the benefits while avoiding unnecessary complexity or errors.

Summary

Voluntary VAT registration allows businesses below the £90,000 turnover threshold to register early and reclaim VAT on business expenses. It can improve cash flow, enhance credibility, and prepare you for growth. However, it also means extra record keeping, reporting, and compliance with HMRC rules.

Before registering, consider whether your customers can reclaim VAT and whether the benefits outweigh the administrative effort. Consulting an accountant will help you decide the best approach for your business and ensure a smooth registration process.