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VAT Registration: What Can You Claim Back – and Is It Worth Registering Early?
VAT registration is often treated as one of those milestones that businesses would rather put off for as long as possible.
And it's easy to understand why.
Once you're VAT registered, there are VAT returns to file, records to maintain and, for most businesses, VAT to add to your sales.
But there is another side to VAT registration that sometimes gets overlooked.
You can also start reclaiming VAT on many of the things your business buys.
Depending on the type of business you run and how much you spend, that can make voluntary VAT registration worth considering well before HMRC forces you to do it.
The important word there is considering. Registering voluntarily isn't automatically a good idea.
So let's look at what you can actually claim, what you may be able to reclaim from before registration, and when registering early can make financial sense.
When do you have to register for VAT?
Let's start with the compulsory bit.
At the time of writing, the UK VAT registration threshold is £90,000 of taxable turnover. You must register if your taxable turnover for the previous 12 months goes over £90,000, or if you expect it to exceed £90,000 in the next 30 days alone.
Notice that HMRC looks at a rolling 12-month period, not simply your accounting year.
That's an important distinction.
A business with a December year-end can't simply wait until December to see whether it has crossed the threshold. You need to keep an eye on your taxable turnover throughout the year.
But £90,000 isn't a minimum turnover requirement for VAT registration.
If you're below the threshold, HMRC allows you to register voluntarily.
And that's where things become more interesting.
So why would anyone volunteer to register for VAT?
The obvious attraction is the ability to recover VAT on qualifying business purchases.
Imagine you're setting up a business and spend:
£6,000 plus VAT on equipment
£2,000 plus VAT on computers
£3,000 plus VAT on professional and other qualifying business costs
That's £11,000 of net expenditure.
If all of those purchases qualify for full VAT recovery and carry VAT at 20%, there's potentially £2,200 of VAT involved.
If you aren't VAT registered, that VAT generally becomes part of your cost.
If you're VAT registered and meet the recovery rules, you may be able to reclaim it.
Suddenly, VAT registration doesn't look quite so one-sided.
What can you reclaim VAT on?
The general principle is fairly straightforward.
If you're VAT registered, you can normally reclaim VAT on goods and services you buy for use in your business, provided the VAT relates to your taxable business activities and you have the appropriate VAT evidence, normally a valid VAT invoice.
That can potentially include everyday costs such as:
stock and materials
tools and equipment
computers and other office equipment
accountancy and professional fees
software and other qualifying services
business travel costs
repairs and maintenance
utilities and other overheads
But don't read that list as meaning everything with VAT on it is automatically reclaimable.
It isn't.
The expense must satisfy the VAT rules, and some categories have their own restrictions.
What if something is partly personal?
This comes up frequently with smaller businesses.
Perhaps you use your mobile phone for business and personal calls. Or maybe you run the business from home.
HMRC doesn't necessarily say that you can't reclaim anything.
Instead, you may be able to reclaim the business proportion.
HMRC gives the example of a phone where half the calls are personal. In that situation, you can reclaim 50% of the VAT on the purchase price and service plan.
Likewise, if you work from home and your office occupies 20% of the floor space, HMRC says you could reclaim 20% of the VAT on relevant utility bills, assuming the other conditions are met.
The important part is being able to justify the calculation.
We'd much rather see a sensible, documented business-use calculation than someone simply claiming 100% and hoping nobody ever asks how they arrived at it.
Cars are where things get more complicated
Cars deserve special mention because VAT recovery isn't as simple as buying a vehicle through the business and reclaiming the VAT.
HMRC restricts VAT recovery on cars where private use occurs.
You may be able to reclaim all the VAT on a new car if it is used exclusively for business and you can demonstrate that private use isn't available. There are also specific rules for businesses such as taxis, driving instruction and self-drive hire.
Commercial vehicles can have different VAT treatment.
And then there is fuel.
Depending on how a vehicle is used, you may reclaim VAT relating to business fuel, reclaim all the VAT and account for an appropriate fuel scale charge, or decide not to reclaim VAT on fuel at all.
This is one of those areas where assumptions can become expensive. Just because another business reclaims VAT on its vehicle doesn't mean yours can do the same.
Check the circumstances first.
There are things you can't reclaim
VAT registration isn't a licence to reclaim every bit of VAT that appears on an invoice.
HMRC specifically restricts recovery in a number of situations.
For example, you generally cannot reclaim VAT on:
purchases that are solely for personal use
goods and services used to make VAT-exempt supplies
business entertainment or hospitality provided to customers and other business contacts
certain goods bought under VAT margin schemes
There are also special rules for partly exempt businesses and some high-value capital assets.
This is why the question shouldn't simply be:
“Did I pay VAT?”
The better question is:
“Is this VAT recoverable by this business?”
Those are not always the same thing.
Here's the bit that surprises people: you may be able to go backwards
Registering for VAT doesn't necessarily mean you can only reclaim VAT on things you buy after your registration date.
HMRC allows qualifying businesses to recover some VAT incurred before VAT registration.
Under the current rules, you may be able to reclaim VAT on:
Goods bought up to four years before registration, provided you still hold the goods, or they were used to make other goods you still hold.
Services received up to six months before registration.
The purchases must relate to the business that has now registered and to its taxable business activities, and you need the appropriate evidence.
That can be particularly valuable for a relatively new business.
Imagine you started trading two years ago and bought £12,000 plus VAT of qualifying equipment that you're still using.
You then voluntarily register for VAT.
Subject to the detailed rules and assuming the equipment remains eligible, the VAT attached to those purchases could potentially form part of your pre-registration VAT claim.
That's worth checking before filing the first VAT return.
When might voluntary VAT registration make sense?
This is where you need to look at the business rather than simply looking at its turnover.
You sell mainly to VAT-registered businesses
Suppose you provide services to other VAT-registered companies.
You currently charge £1,000.
After VAT registration, you charge £1,000 plus £200 VAT.
If your customer can recover that £200 in full, the VAT may not represent a real additional cost to them.
Meanwhile, you may now be able to recover VAT on qualifying purchases made by your own business.
That can make voluntary registration considerably more attractive for some B2B businesses.
You have substantial VAT-bearing costs
A business investing heavily in equipment, stock, machinery or other qualifying expenditure may have significant input VAT available to recover.
The numbers can become quite meaningful.
If you spend £30,000 plus VAT on fully qualifying purchases taxed at 20%, that's £6,000 of VAT.
It makes sense to include that in the calculation when deciding whether to register.
You're about to make a large investment
This is another situation where it's worth looking at VAT registration before making the decision rather than afterwards.
Registration dates matter.
HMRC has specifically warned businesses to consider their chosen effective date carefully when voluntarily registering. If you make a mistake with the voluntary registration date and it affects your pre-registration cost calculations, you shouldn't assume HMRC will simply change it later.
In other words, don't pick a date casually.
When might voluntary registration be a bad idea?
There is a flip side.
Imagine you're a tradesperson selling mainly to homeowners.
You currently charge £1,000 for a job.
Once VAT registered, you have a decision.
If you charge £1,000 plus VAT, your customer now pays £1,200.
Unlike a VAT-registered business customer, the homeowner normally can't reclaim that £200.
Alternatively, you could keep the customer's price at £1,000 and absorb the VAT yourself.
But that reduces the amount you retain.
This is why two businesses with identical turnover can reach completely different conclusions about voluntary VAT registration.
A consultant selling almost entirely to VAT-registered companies may view it very differently from a consumer-facing business operating in a price-sensitive market.
Don't register just for the VAT reclaim
The ability to reclaim VAT is attractive, but it shouldn't drive the decision on its own.
Once registered, you take on VAT responsibilities as well.
You'll need to charge VAT where appropriate, maintain suitable VAT records and submit VAT returns. You'll also need to think carefully about cash flow because some of the money arriving from customers belongs to HMRC, not to the business.
There are VAT accounting schemes that can help certain businesses.
For example, HMRC's Cash Accounting Scheme generally lets eligible businesses account for VAT on sales when customers pay them rather than when they issue the invoice. Businesses can normally join if they expect taxable supplies in the following year to be no more than £1.35 million and meet the other eligibility conditions.
That can be useful where customers take a long time to pay.
But again, whether it's suitable depends on the business.
What about the Flat Rate Scheme?
The Flat Rate Scheme sometimes enters the conversation when smaller businesses consider VAT registration.
Under this scheme, you still charge customers VAT at the normal applicable rate, but you calculate the amount you pay to HMRC using a flat-rate percentage determined by the nature of your business.
There is an important catch when we're talking about VAT reclaims.
Under the Flat Rate Scheme, you generally cannot reclaim VAT on ordinary purchases, because the scheme's percentages already take input VAT into account.
There is an exception for certain qualifying capital expenditure goods costing £2,000 or more including VAT in a single purchase.
So if recovering VAT on your costs is one of the main reasons you're considering registration, don't assume the Flat Rate Scheme will produce the same result as normal VAT accounting.
Run the numbers first.
So, should you register early?
There isn't a universal answer.
We'd start with four questions:
Who are your customers? Are they mainly VAT-registered businesses or consumers who cannot recover VAT?
How much VAT are you paying on your costs?
What qualifying VAT might you be able to recover from expenditure before registration?
What happens to your prices and margins once you start charging VAT?
Then put actual numbers against the answers.
For example, voluntarily registering to recover £5,000 of VAT sounds attractive.
But if registration forces you to absorb £10,000 of VAT each year because your customers won't accept higher prices, you've solved the wrong problem.
On the other hand, if your customers are VAT registered, your business incurs substantial VAT-bearing expenditure and your pricing is quoted plus VAT anyway, voluntary registration could look very different.
VAT registration isn't just a threshold question
This is probably the most useful way to look at it.
Don't treat VAT registration as something that simply happens when turnover reaches £90,000.
For some businesses, waiting until registration becomes compulsory makes perfect sense.
For others, voluntary registration can allow them to recover meaningful amounts of VAT and may suit the way they trade.
The decision needs some thought.
What do you buy? Who do you sell to? How much VAT could you recover? What would VAT do to your prices?
Answer those questions and you can make a much more informed decision than simply watching the £90,000 threshold getting closer.
Thinking about registering for VAT?
If your business is approaching the VAT threshold, you're planning a significant purchase, or you're wondering whether voluntary VAT registration could work in your favour, talk to us before choosing your registration date.
At Ledgers Accountants, we can look at the numbers with you, identify the VAT you may be entitled to reclaim and help you understand what registration would mean for your prices, margins and cash flow.
Sometimes waiting makes sense.
Sometimes registering early does.
The useful part is knowing which applies to your business before you make the decision.
This article provides general information and doesn't replace advice based on the individual circumstances of your business. VAT treatment can vary according to the nature of the purchase, the supplies you make and the VAT scheme you use.
