There are two different types of registration – compulsory and voluntary:

  1. Compulsory

A person who makes taxable supplies becomes liable to be registered if:

  1. At the end of any month, the value of his taxable supplies in the period of one year then ending has exceeded the registration limit, which is £85,000 from 01 April 2017 until 31 March 2022.
  2. At any time, there are reasonable grounds for believing that the value of his taxable supplies in the next 30 days will exceed the £85,000 limit.
  3. If, where a business carried on by a taxable person is transferred as a going concern, the taxable supplies for the twelve months prior to the transfer exceed £85,000.

Note that the VAT registration threshold is normally increased in year in line with inflation, but the 2018 Autumn Budget fixed the VAT threshold at £85,000 until 31 March 2022.

In the most common situation, i.e. (a) above, the person must notify HMRC of the liability within 30 days of the end of the month in which the value of the taxable supplies first exceeded £85,000. If, for example, the value of the taxable supplies first exceeded £85,000 in the twelve months to 31 March, then HMRC must be notified by 30 April and VAT registration would commence on 1 May.

  1. Voluntary

In certain circumstances, it is possible to register on a voluntary basis for VAT even though the value of taxable supplies may never exceed £85,000. This is normally only beneficial where the majority of supplies are being made to customers who are themselves VAT registered, e.g. it would not be beneficial for a domestic painter with taxable supplies of £30,000 to be registered, whereas it may be beneficial for a commercial or industrial painter with the same level of supplies.

The other situation in which a voluntary registration might be beneficial is where the supplies are all zero-rated and no VAT is charged on the transaction. All VAT suffered by the trader on expenses can be reclaimed from HMRC.

In summary, the advantages and disadvantages of a voluntary registration are as follows:

Advantages

  • enables input VAT suffered to be reclaimed;
  • A VAT number can give the impression that a business is larger than it actually is which sometimes can increase the possibility of obtaining work.

Disadvantages

  • the requirement to prepare VAT returns on a quarterly basis and to submit them and if applicable pay over the VAT due within one month of the quarter end – is the amount of work involved worth it for the input VAT that can be reclaimed?
  • HMRC may periodically visit the business (about every five years but depends upon the risk of errors) to ensure that VAT is being properly accounted for. There may be penalties for incorrect returns.
  • Where most of the customers cannot reclaim VAT, such as domestic consumers, your prices will be uncompetitive compared to non-VAT registered suppliers.