Pros, Cons & What Small UK Businesses Need to Know
For many small business owners, staying under the VAT registration threshold (£90,000 as of 2024/25) seems like a no-brainer. Avoid the admin, avoid hiking your prices. What’s not to like?
But voluntary VAT registration can come with real benefits, particularly if you’re spending heavily in the early stages or working with other VAT-registered businesses.
Here’s a straightforward look at what it means, when it might make sense, and what HMRC rules allow.
What Is Voluntary VAT Registration?
Voluntary VAT registration simply means registering your business for VAT before your turnover reaches the mandatory threshold of £90,000. Once registered, you’ll need to:
-
Charge VAT on your taxable sales
-
Submit regular VAT returns (usually quarterly)
-
Follow Making Tax Digital (MTD) rules, including digital record-keeping
While this adds to your admin workload, it can also open up opportunities to reclaim VAT on business expenses and strengthen your professional credibility.
Can I Reclaim VAT on Pre-Registration Costs?
Yes – if you meet HMRC’s rules, you can reclaim VAT paid before registration on both goods and services.
Goods (e.g. equipment or stock)
You can reclaim VAT on goods bought up to four years before registration, as long as:
-
The goods are still in use or in stock
-
The business was operating during that time
-
You have valid VAT invoices and records
Services (e.g. website design, consultancy)
You can reclaim VAT on services bought in the six months before registration. These must have been used to help start or run your business and not have been recharged to customers.
How Voluntary VAT Registration Can Help Cash Flow
If your business purchases a lot of goods or services from VAT-registered suppliers, registering early allows you to reclaim input VAT; freeing up working capital that would otherwise be tied up.
This can be particularly helpful for businesses with high start-up costs or those that buy in bulk.
Will VAT Registration Put Off My Customers?
That depends on who your customers are.
If you sell mainly to VAT-registered businesses, they can usually reclaim the VAT, so it makes no difference to them.
But if your clients are individuals or non-VAT-registered businesses, charging VAT could increase your prices in a way that affects competitiveness. It’s also worth noting that registering doesn’t mean you have to pass on the full 20% – pricing is still up to you.
Avoiding VAT Penalties: A Hidden Benefit
One overlooked benefit of voluntary registration is that it can help you avoid late registration penalties. If you register from the start, you won’t risk accidentally crossing the £90,000 threshold and missing your legal obligation to register, something HMRC does penalise.
What’s an Intending Trader, and Should You Register Early?
HMRC allows businesses to register as an intending trader. That means even if you haven’t made any sales yet, you can register for VAT if you’re actively preparing to trade.
This lets you reclaim VAT on set-up costs before the business formally launches, without falling foul of the pre-registration time limits (especially useful for services, which have a tighter six-month reclaim window).
Downsides of Voluntary VAT Registration
While there are benefits, it’s important to weigh up the downsides too:
-
More admin: VAT registration means quarterly VAT returns, compliance with Making Tax Digital, and the need to keep digital records.
-
Possible pricing impact: If you’re selling to the public, adding VAT may make you less competitive – depending on your sector and pricing model.
Is Voluntary VAT Registration Right for Your Business?
It depends. If your customers are VAT-registered and your business incurs a lot of VATable costs, early registration can help cash flow and streamline compliance as you grow. If your clients are consumers or your turnover is uncertain, it may not be the right move…yet.
Want to talk it through?
If you’re not sure whether to register voluntarily, we can help you run the numbers and assess the impact based on your specific business.
Book a free 15-minute call or get in touch for clear, no-fuss advice.