What To Do When Being VAT Registered Is Killing Your Business

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Being VAT-registered can indeed have a significant impact on businesses, especially smaller ones. Some businesses might thrive after VAT registration while others may begin to feel the pinch since they are struggling.

What can you do if your business is struggling to succeed after VAT registration? Below, we will explore some steps you can take if you find that VAT registration is negatively affecting your business.

What Is VAT?

VAT stands for Value Added Tax. VAT is a consumption tax that is added to products and services. So, when your business purchases products or necessary resources from a supplier, you’ll need to pay VAT on these items. Then, your business will charge VAT on top of the final selling price for your products or services, and it’s your customers that pay this VAT. 

Businesses that are VAT registered must gather VAT from their clients / customers and then pass this money on to the government.

Typically, your company is only obligated to pay the government the difference between the VAT you paid the supplier and the VAT you have since accrued from your transactions.

Who Needs to Register for VAT?

Requirements for VAT registration by businesses will vary from country to country, and sometimes even from city to city. When you start your business, it’s worth checking when you will have to register for VAT.  VAT registration can depend on: 

1. Turnover Threshold: Also known as a sales or revenue threshold, once your business’s annual profits exceed a certain amount, you will be required to register for VAT. 
2. Business Type: Some ‘businesses’ may not be required to register for VAT immediately. For example, freelancers or sole proprietors may have a higher threshold to meet before they need to be VAT registered. 
3. Cross-Border Transactions: If your business imports/exports goods or services, this may affect the requirements for VAT registration. 
4. Digital Services: If you provide digital goods such as software, or digital services such as subscriptions in more than one country, you may be required to adhere to VAT requirements in all jurisdictions. 

Do You Lose Money Being VAT Registered?

The short answer is no, you do not lose money solely by being VAT registered. This is because VAT is paid by the end consumer, customers who buy your products, and your role is to pass it onto the local or national government.

As a business, you’re simply acting as a middle-man between the customer and the government hence you don’t lose any money.

However, some business owners still say ‘being VAT registered is killing my business’. VAT registration can give the impression that your profits are decreasing.

What Are the Disadvantages of Being VAT Registered?

If you’ve found yourself thinking that being VAT-registered is killing your business, it may be because of: 

Administrative Burden - Your business will need to keep VAT records, submit VAT returns, and be subjected to VAT-related audits. These administrative tasks take up time that would previously have been spent on your business, resulting in fewer resources. 

Customer Impact - As charging VAT means customers must pay more for the same products or services, they may choose not to buy from your business at all.

Competitive Disadvantage - If a close competitor is not VAT registered, their prices will be lower. Your customers may choose to patronize their business instead so they can avoid paying VAT.

Cash Flow Issues - If your business has a long payment cycle, VAT can affect cash flow. If you have to wait for customers to respond to invoices, you will still need to pay the VAT charged on their transaction by a deadline even if you haven’t received their payment.

Are There Any Advantages to Being VAT Registered?

 Although there are some disadvantages to being VAT registered, there are some advantages. These are: 

VAT Reclaims and Refunds - As a VAT-registered business, you may be able to reclaim the VAT you paid to suppliers when purchasing products or tools needed to provide your services. If this VAT amount exceeds the amount you collect from customers, you’ll be able to apply for refunds. 

Professional Reputation - Being VAT registered can make your business appear legitimate and trustworthy to potential customers. This also works in your favor if you are seeking a loan or credit from a major financial institution. 

Business to Business (B2B) Sales - B2B transactions often require both parties to be VAT registered. Once your business is registered, you’ll be able to buy from and sell to businesses. This opens your business up to long-term partnerships with respected suppliers or clients. 

What can I do if VAT registration is negatively affecting my business?

If VAT registration is negatively affecting your business, there are some steps you can take to either lessen your VAT liabilities such as:

Assess the Situation - Begin by evaluating the impact of VAT registration on your business and consider factors such as cash flow, administrative burden, and customer perception. Are you losing customers due to higher prices caused by VAT? Is the paperwork overwhelming?

Flat-Rate Schemes - These schemes allow you to determine VAT payments based on your total profits, rather than accounting for VAT on individual purchases. Depending on your gross sales, this can result in lessened VAT liabilities. 

Cash Accounting Schemes - If your business relies on invoices for customer payments, cash accounting schemes can help maintain your cash flow. These schemes mean you'll only pass along VAT once a customer has paid for their product or service. 

VAT-Exempt Products - Some products and services, such as certain foodstuffs and medical supplies, are exempt from VAT. Building your catalog around these products can significantly lower your VAT liabilities. However, you will not be able to reclaim VAT paid on the supplies needed to produce these goods or services. 

Zero-Rated Products - Similarly, some products may have a zero rate for VAT. This means that, while they are still within the scope of VAT, no VAT is charged. This is useful as you can reclaim VAT spent on supplies for zero-rated products and services. 

Lease/Hire Supplies - If you are unable to reclaim VAT on purchases from suppliers, leasing or hiring supplies can save you money. For example, if you sell t-shirts, rather than purchasing a printing machine with VAT added, you can simply hire these machines and avoid paying VAT. 

Group Registration - Some business owners have multiple businesses that must pay VAT individually. Certain jurisdictions make it possible to register these businesses as a group and calculate VAT amounts based on total gross. This can lessen VAT liabilities and administrative responsibilities. 

Voluntary Deregistration – If your taxable turnover falls below the VAT threshold which is currently £85,000 in the UK, you can voluntarily deregister for VAT. Deregistration can simplify your accounting processes and reduce administrative costs.

Review Pricing Strategies - If VAT is causing your prices to be less competitive, consider adjusting your pricing strategy by exploring whether absorbing the VAT cost or adjusting your profit margins is feasible.

How To Stop Paying VAT?

If you registered for VAT voluntarily but still do not meet the requirements for compulsory registration, you can withdraw your registration. Check your jurisdiction’s VAT requirements as your business may be exempt depending on the types of goods or services that you offer. 

However, if your business does meet the threshold for VAT registration, you must pay that VAT to the government. Even if you feel ‘being VAT registered is killing your business’, you are legally obligated to pay VAT.

If you don’t comply with VAT regulations you can be fined or legal action may be taken against your business. 

In conclusion, the conditions for when a business should become VAT-registered will differ. They depend on where your business operates and whether it engages in international trade. When your business reaches a particular scale or deals with specific types of products, VAT registration becomes necessary.

If you feel that being VAT-registered is killing your business, there are a few ways you can lessen the impact on your profits. These include making the most of flat-rate and cash accounting schemes, focusing on exempt or zero-rate products and services, and exploring group registration. 

Ultimately, voluntary VAT registration can help you in the long run. But this decision is not to be taken lightly and you should ensure voluntary VAT registration will still allow you to achieve your business goals.

Icon Offices provides VAT registration services to clients from all around the world, helping them to register for VAT in the UK for all types of businesses.

To streamline your VAT process, you can contact us at info@iconoffices.co.uk to guide you on the best course of action and help you understand the implications of VAT registration.

FAQ

What is voluntary VAT registration?

Voluntary VAT registration is when you choose to register for VAT, even if your business does not meet the thresholds for mandatory registration which is currently at £85,000. 

Is voluntary VAT registration worth it?

Voluntary VAT registration can have some advantages. If you pay high amounts of VAT to suppliers, it may be worth registering for VAT so you can reclaim some of these expenses. 

Is it bad to be VAT registered?

If your business does not meet the requirements for VAT registration, voluntary VAT registration can have disadvantages. Ensure the amounts you’ll be able to reclaim from business expenses balance with the VAT you’ll need to charge your customers.