For businesses, both big and small, Value Added Tax (VAT) registered companies continue to receive plenty of benefits — whether that's from having sound financial planning or generally receiving greater opportunities to expand.
As a result, non VAT registered businesses continue to be at an unnecessary disadvantage, regardless of how well they might be performing otherwise.
So, throughout this article, we'll be taking a look at four of the most significant reasons your business should register for VAT — covering why it's so much more than just a legal requirement and can actually have a huge influence on your financial success.
1. Access to Input Tax Credit
Put simply, input tax credit lets your business reclaim VAT that's been paid on any of your purchases or expenses. In essence, it mainly reduces the overall tax burden on your business, so it's generally considered quite a helpful way of managing some of your finances.
Let's say, for instance, that your business gets charged VAT whenever you're purchasing something, whether it's raw materials, office supplies, or general equipment — the specific industry you're in is irrelevant.
Once you've become VAT registered, you're actually able to reclaim VAT paid on any of those expenses from the tax authorities, which, of course, effectively means you're getting back a hefty portion of the total fee.
Obviously, the specific amount you'll be able to recover from this, but for any businesses with fairly significant expenditures, this can end up being quite a substantial sum of money. And, with that money, you're naturally able to invest it back into your business, which can be a game-changer.
2. Enhanced Credibility
It goes without saying that having some kind of credibility goes a long way in terms of your business/brand image, and voluntary VAT registration is generally one of the best ways you can obtain it.
Essentially, VAT registration signals to your customers, suppliers, and even other partners that you're actually committed to being transparent about your finances — not to mention how compliance with tax regulations increases trust, too.
Aside from this, though, being registered for VAT can be quite a reassuring sign to any of your potential customers, given how many people prefer working with VAT-registered suppliers.
Why? Basically, it means they'd be able to claim input tax credits on their own valid VAT invoices. As a result, they would be able to reduce their costs as they can re-claim VAT that you charge them on any of your goods or services — making all parties happy.
As for your potential suppliers or partners, they might also be more willing to work with your business since it simplifies a lot of their own tax obligations by no longer needing to account for VAT on their purchases.
3. Ability to Charge VAT
Moving on from the previous benefits, arguably one of the most substantial reasons you'd register for VAT voluntarily is because of the ability to charge VAT on your sales.
In practical terms, this means that as a VAT-registered business, you actually have the legal right to add VAT to the prices of the goods or services that you provide to your customers. This added VAT is most commonly known as “output tax”.
Now, while these VAT payments/charges might just seem like more financial burdens, they're generally one of the best ways you can save money as a business.
Let's break down how this works in a bit more detail:
Recovering Input Tax
As we touched on earlier, VAT-registered businesses are able to reclaim any of the VAT that they've paid on their purchases and expenses, and this is known as “input tax”.
In essence, when you're charging VAT on your sales, you are basically collecting tax on behalf of the government, which then becomes your “output tax”.
Offsetting Input and Output Tax
The best part about VAT lies in the offset, though, as your output tax (VAT collected from customers) can actually be offset against your input tax (VAT paid by you).
This may sound slightly confusing at first glance, but the fact that you can offset these types of tax against each other means that you're only ever paying the difference to the tax authorities — i.e. saving money for your business.
Reducing Tax Liability
So, charging VAT on any of your products or services generally reduces your overall tax liability — if your input tax ever exceeds your output tax in any given tax period, you will actually receive a VAT refund from the tax authorities, which can certainly be a nice little surprise.
On the other hand, though, you'll end up needing to pay the difference to the tax authorities if your output tax ever exceeds your input tax.
Still, the whole process of charging and reclaiming VAT is generally just an effective way to manage your business's tax obligations, as you're able to recover the VAT you've paid on your operational costs while ensuring that you're always collecting tax on your sales.
We'll be the first to say that it's not a particularly easy process to follow, but the key to making all of this work is simply by keeping accurate records and staying compliant with VAT regulations.
Lastly, on this point, it's vital to note that any of the VAT you're charging absolutely has to be remitted to His Majesty's Revenue and Customs (HMRC) on time if you want to avoid any particular penalties and/or legal consequences.
So, any businesses that are registered for VAT need to have a clear understanding of their VAT obligations — as well as maintaining meticulous records to support their VAT returns.
Read Also: VAT Deadlines & Penalties: Key Dates & Information for Your Company
4. Potential for International Trade
In what's only becoming a more and more globalised business world, any companies, both big and small, that aren't considering international trade are missing out on a serious opportunity for growth and revenue.
Generally speaking, VAT registration plays quite a pivotal role in facilitating this kind of trade. Let's explore this in more detail:
Simplifying Customs Procedures
Firstly, VAT registration streamlines some of the customs procedures that your business has to navigate whenever you're engaging in international trade. As a matter of fact, VAT-registered businesses actually gain access to special customs arrangements that can speed up how fast your goods are moved across borders.
This then translates into faster clearance times at customs checkpoints, reducing delays and any of the associated costs that come with international trade.
Advantages for Importers and Exporters
VAT registration is particularly advantageous for businesses involved in importing and exporting goods and services. Here's how:
Importers
When importing goods, VAT-registered businesses can often defer the payment of import VAT. This means you don't have to pay VAT upfront when your goods enter the country.
Instead, you end up accounting for import VAT on your VAT return, which does wonders for improving your cash flow.
Exporters
Exporting goods or services to other countries is often a pretty complex procedure since there are varying tax regulations and requirements — VAT registration simplifies this process.
What's more, you may even be able to zero-rate your exports in some cases, meaning you charge 0% VAT to your overseas customers. Naturally, this is going to make your products or services more attractive in international markets.
