What is VAT Registration? How does it work?

What is VAT registration and how does it work?

VAT (Value Added Tax) registration is the process of registering for a value-added tax with the tax authorities. Value-added tax is an indirect tax added to the value of goods and services at each stage of their production and sale. Before we jump straight to the advantages of VAT registration, note that registration can be either voluntary or mandatory. Generally, a company must register if its annual taxable turnover exceeds the threshold specified in the tax regulations. The VAT threshold varies from country to country, but in most jurisdictions, this figure does not exceed 100,000 Euros or its equivalent. Another way to fall under compulsory registration is by importing and exporting goods. The rules for VAT registration in the UK and the EU are constantly being updated.

After registration, the company is obliged to include the value-added tax in the cost of its goods and services. This increases the price paid by the final consumer.

If your company is subject to mandatory registration, this article will help you better understand the essence of value-added tax and get some practical tips for business taxation. However, if you are a small business with a low turnover, you should also consider voluntary registration. There is a significant number of entrepreneurs who decide to apply for VAT registration before reaching the minimum turnover threshold. And here's why.

 

Advantages and Disadvantages of VAT Registration

As with everything in the world, the registration of value-added tax leads to both positive and negative consequences. Our mission is to provide as many strengths and weaknesses of registration as possible. Below, you can find the qualified pros and cons of VAT registration. Some of them may seem ordinary, and some you may have never considered before.

Pros of VAT Registration

There are many advantages to getting VAT registered:

• The company has the right to reclaim VAT on goods and services purchased from other VAT-registered businesses. Sellers or service providers often charge VAT when you order for your business. Since your company is also VAT registered, you can deduct the amount you paid on these purchases from the tax you've collected on your sales, or get it refunded. Reclaiming input value-added tax reduces your company's overall tax burden. Note that this only works for business-purpose purchases.
• The possibility to reclaim VAT on expenses before VAT registration. For example, in the UK, you can reclaim value-added tax for goods you bought up to 4 years before registration and for services you received up to 6 months before. The goods must remain in use at the date of the reclaim.
• Counterparties who are VAT registered can also reclaim the VAT on goods and services purchased from your company. This means that the value-added tax component of your price is not a burden to such customers. The price remains competitive for companies that are not registered for value-added tax.
• It makes the company more reputable. Companies registered for VAT often appear more substantial in the eyes of the customer. This occurs even in the case of voluntary registration because people have an inherent tendency to unconsciously overestimate the company's revenue.
• New business opportunities are another advantage of VAT registration. Some business people prefer VAT-registered firms over unregistered ones. The absence of a value-added tax number on issued invoices can often scare off a potential business partner. Conversely, VAT registration strengthens the confidence of counterparties in your company's reliability.
• The company receives a VAT number. The company can use it on its website, invoices, letters, company profiles, etc. It gives an additional positive image about your business.
• Rigor in record-keeping. Value-added tax registration forces your company to keep records accurately. It helps you run your business effectively and efficiently. Planning and forecasting, compliance and tax reporting, and decision-making are the benefits of proper record-keeping. It also always provides you with the necessary evidence in case of any disputes or litigation.
• Cost-effectiveness of the business. Let's simulate the situation. You have a UK company voluntarily registered for value-added tax. In the UK, the annual turnover would have to exceed £85,000 to trigger the threshold. The general tax rate in the UK is 20%. Your revenue in the reporting fiscal year is equal to £50,000, of which £40,000 is yours and £10,000 is the tax collected by the tax authority. Your costs are £26,000, of which £15,000 are transactions with VAT (tax rate is 20%). This means that the profit is equal to £40,000 (revenue) - £26,000 (costs) + £3,000 (the tax you paid for materials and services) = £17,000 instead of the £14,000 you would get without a refund.

Cons of VAT Registration

Despite all the advantages of VAT registration, there are also some disadvantages you should be aware of:

• Additional expenses for record-keeping. Maintaining proper records requires a lot of attention and administrative effort. It is appropriate to involve a professional in this matter, which will lead to increased costs spent on paying for such services.
• Higher cost of goods and services. If you charge VAT, your products and services may become more expensive and less desirable. This is particularly relevant for customers who are not registered for value-added tax or for final consumers who cannot apply for a reclaim.
• Large VAT bill. If you supply/provide more goods and services than you receive, you will have to pay the difference to the tax authority. This can cause cash flow problems if you are not expecting a high value-added tax charge.

What You Need to Know About VAT Registration

How to Get VAT Registered?

You need to collect the required package of documents and apply to the responsible tax authority. More information is available in our article VAT Registration Number: What It Is and How to Get It.

When should you register for VAT?

There is voluntary and compulsory registration. Any business can apply for voluntary registration if it deems it necessary for specific reasons. To fall under compulsory registration, one of the following conditions must be met:

• The company is involved in the import/export of goods or services.
• The company sells domestic goods/services, and its turnover exceeds the minimum threshold. The threshold varies between jurisdictions.

What do you need for VAT registration?

Registration documents may vary depending on the country, the nature of the business, and the specifics of the particular situation. Our lawyers will provide complete guidance and assistance in value-added tax registration in your case.

What does being VAT registered mean?

A company or person who registers with their country's tax authorities for value-added tax is said to be VAT registered. This means that after registration, you are obliged to charge value-added tax on taxable sales, collect it from customers, and comply with all applicable tax rules and requirements.

 

Is it worth getting VAT registered?

There are many advantages to being VAT registered. However, the decision on whether to apply for value-added tax should be evaluated based on the specifics of each individual case.