Perhaps unsurprisingly the research showed VAT registered businesses were more likely than unregistered borderline businesses to make most (i.e. more than 
60%) of their sales to other VAT registered businesses, and this was even higher among voluntary registered businesses. In contrast, the majority of unregistered borderline businesses make most of their sales to consumers or unregistered businesses.
Accountants were the most common source of advice on VAT. The second most common source was HMRC. The qualitative research suggests businesses found the VAT sections of the gov.uk website helpful, but experience of the helpline was more mixed.
VAT registered businesses were asked about awareness of different aspects of VAT. Awareness was very high across most aspects, including the need to submit accurate returns on time, the ability to claim back VAT and the requirement of additional record keeping. Awareness among unregistered borderline businesses was mixed. While most claimed to know that businesses should register for VAT once their sales are above a certain threshold, just over a quarter could give the current VAT threshold. Around a quarter were not aware that businesses can reclaim VAT. The greatest uncertainty was about whether VAT is only due once an invoice is issued and if customers based overseas need to be charged VAT.
The research suggests that levels of awareness were closely linked to prior experience of VAT. The most common unprompted reason given for registering for VAT by voluntary registered businesses is the expectation of reaching the threshold soon, followed by agent advice and the ability to reclaim VAT. The qualitative research revealed some businesses viewed voluntary registration as a precautionary measure – they expected to grow and did not want to risk being in breach of regulations. Most mandatory registered businesses said exceeding the threshold was the main reason they registered.
Having registered, the main benefit was seen as reclaiming VAT. This was followed by improved reputation or credibility. Overall around three in ten said they have not experienced any benefits, with mandatory registered more likely to say this. However, after prompting, more businesses agree than disagree that being registered is good for their business and that other VAT registered businesses are more likely to do business with them.
Additional administrative burden was the most commonly anticipated drawback of registering. Reflecting initial expectations, extra paperwork and administration was the most frequently mentioned drawback after registering – although, when prompted, the majority of businesses disagreed administration is too much of a burden. The qualitative research also found the administration was not overly onerous; businesses explained that compiling and checking quarterly returns was the principal burden, more than day-to-day record keeping. Other drawbacks related to the financial impact of VAT registration, such as the need to increase prices or the reduction in profit. After registering, most businesses kept their prices the same.
Virtually all businesses paid their VAT quarterly and most accepted the stagger period they were allocated when they first registered – only five per cent recall ever requesting a different one. Typically businesses were unable to see any clear advantage in changing this – as most were filing quarterly, it was seen as unlikely that all dates would fall at a ‘good period’. Furthermore, views were mixed on the prospect of aligning VAT quarterly cycles with quarterly cycles of other taxes.
Overall, 20% of unregistered borderline businesses admit to having taken some action to remain under the threshold and outside the VAT system. Businesses restricted their turnover in several different ways (sometimes illegally), with the most common being closing the business or stopping advertising, refusing or turning down work, asking customers to purchase materials, reducing prices of products to ensure the VAT threshold is not reached or splitting the business by operating as a separate legal entity or artificially separating the business by product or service. Most unregistered borderline businesses felt they would find it difficult to increase prices to cover VAT charges and this was perceived as a major barrier among those taking part in the qualitative research.
Most businesses restricted their turnover to remain outside the VAT system because they expected VAT registration to negatively affect their profit, or their competitiveness if the cost was passed on to their customers. Businesses with a higher proportion of business-to-consumer sales and low input costs perceived a substantial financial impact. The qualitative research also found that restricting business activity often involved considerable effort and monitoring of turnover, and turning down work could impact on a business’ reputation. Some businesses felt frustrated that they were not able to grow without incurring this financial impact. Several measures were suggested to reduce the financial shock for businesses, from simply increasing the VAT threshold to full redesigns of the system.
If you’re a business that is considering VAT registration of a business that is already operating within VAT requirements get in touch with our team of VAT experts who can help you get it right. You’ll also find more VAT information here.
