Behaviours and experiences in relation to VAT registration

On 16 November 2017, HMRC published a research report entitled Behaviours and experiences in relation to VAT registration.

The timing of this report is interesting. On 7 November 2017, the OTS published its report on routes to the simplification of VAT, where consideration of the VAT registration threshold was one of the main points. On 13 November 2017, the House of Commons library issued an updated version of its briefing paper on VAT registration, to include comments on the OTS report. We eagerly await the Chancellor’s comments on the subject in the Budget on 22 November 2017.

The key objectives of the research report were to explore:

  • the main factors that affect a business’ decision to register for VAT voluntarily when its turnover is below the VAT threshold
  • the main issues faced by newly VAT registered businesses, whether the current VAT simplification schemes address these issues and how they could be improved
  • the types of business that restrict business activities to remain below the VAT threshold, their main reasons for doing so and how they ensure they remain below the threshold.

The research was conducted with businesses that had registered for VAT in the last two financial years and those that had a turnover below, but close to, the threshold in the last two financial years. It consisted of 2,013 quantitative telephone interviews and 40 follow-up qualitative in-depth interviews.

The key findings were as follows:

  • VAT registered businesses were more likely than unregistered borderline businesses to make most (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. 67% of registered businesses received information from an accountant when deciding to register and 57% of unregistered borderline businesses have sought information on VAT from an accountant. The second most common source was HMRC (14% of VAT registered businesses and 11% of unregistered borderline businesses), with at least nine in ten of each group finding the advice useful.
  • The most common unprompted reason given for registering for VAT by voluntary registered businesses was the expectation of reaching the threshold soon (26%), closely followed by agent advice (20%) and the ability to reclaim VAT (13%).
  • Additional administration was the most commonly anticipated drawback of registering (cited by 35% of voluntary registered and 31% of mandatory registered businesses). Other drawbacks related to the financial impact of VAT registration, such as the need to increase prices or the reduction in profit. After registering, 52% of businesses kept their prices the same although 25% did increase them. 23% were VAT registered from the start. Around one in ten businesses specifically mentioned the increased cost of undertaking extra administration as one of the main disadvantages of being registered and after prompting 78% said they had incurred costs, usually increased accountancy bills.
  • 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 (47%) being closing the business or stopping advertising, refusing or turning down work (21%), asking customers to purchase materials (16%), 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 (both 10%). 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 additional cost of VAT was passed on to their customers.