The benefits and disadvantages of VAT registration

Before your e-commerce business is even off the ground there are a plethora of choices to be made that may affect your bottom line. If you have just started trading, how do you know if Value Added Tax (VAT) registration is the right choice for you?

Business owners often associate VAT registration with endless paperwork and yet another bill to take care of, but VAT needn’t be the enemy. Let’s look at when you need to register, and when it is prudent to register voluntarily.

For some e-commerce businesses VAT registration may be mandatory. If your taxable turnover exceeds the £85,000 threshold you are required to register for VAT. Find out more here.

What is VAT?

VAT is a consumption tax charged to consumers upon the sale of certain goods and services. Different countries have different thresholds bit in the UK, the standard VAT rate is 20% of the purchase price and e-commerce sellers are subject to VAT registration when their taxable turnover exceeds £85,000 over 12 months.

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On your e-commerce site, it is important to make customers aware of VAT. Most e-commerce stores choose to display prices as VAT inclusive.

The basics of mandatory VAT registration

If your e-commerce business has a taxable turnover of more than £85,000 (2024/25 figures) or you expect your turnover to go over £85,000 in the next 30 days, then it is mandatory for you to register for VAT. This removes any grey area, and if that’s you, you will now need to decide which VAT scheme is best suited to your business. The threshold is not based on a calendar year. It is a 12-month rolling calendar, so don’t get caught out!

You will also need to register if you are based outside of the UK but are selling goods located in the UK or selling to UK customers. There is no threshold related to these specifics so VAT registration will be mandatory straight out of the gate.

You can also choose to register for VAT is your turnover is less than £85,000, known as ‘voluntary registration’.

Once you have completed VAT registration you must charge VAT on applicable sales and are liable to HMRC for your VAT liability. If you don’t, or if you don’t register when required to, HMRC can impose penalties on you, and contact any online marketplaces you trade through. This will likely lead to your removal from those platforms, and as a result, the quick demise of your e-commerce business.

Luckily registering for VAT is a simple and straightforward process, but if you need a hand, at Unicorn Accounting we can help.

However, if everything you sell is exempt from VAT, you do not have to register for VAT.

What is exempt from VAT?

Most goods and services are subject to the standard VAT rate of 20% in the UK. However, some are subject to a reduced VAT rate of 5% and some goods and services are exempt from VAT entirely.

Items with a VAT rate of 0% are considered essential goods and services such as food and drink, children’s clothing, and selected medical treatments.

While these items are exempt from VAT, they should still be recorded as a business transaction in your business accounts.

Additional examples of VAT exempt goods and services include education and training and antiques.

Examples of goods and services with a VAT rate of 5% include children’s car seats, mobility aids, and nicotine patches.

Register e-commerce business for VAT with HMRC
Fred Mouniguet


EORI number

If you do opt for VAT registration and plan on shipping goods outside of the UK either independently or through an e-commerce platform such as Amazon Marketplace, make sure you also apply for your EORI number at the same time to avoid needless delays. An EORI number, or Economic Operator Registration and Identification number, is used to identify you and collect duty on your goods within the UK and the EU. It is mandatory if you are shipping to and from the EU; with more and more e-commerce businesses going international it is very likely you will need one.

Multiple e-commerce platforms now allow for international purchases and multi-currency exchanges so to stay ahead of the game and competitors, this may be something you wish to consider to scale your business.


Benefits of voluntary VAT registration

There are several benefits that may sway you to register your e-commerce business before compulsory registration kicks in.

VAT is not a one-way street. If you are about to make sizeable purchases, being able to claim back VAT can be a smart way to soften the financial blow that is often associated with business growth. If you are just starting up, or about to undertake a serious expansion, then reclaiming the VAT on your purchases may be the right move. You can claim back VAT on business expenses and items you by to use in your business such as travel expenses and company mobile phones.

The illusion of size

Nothing gives the illusion of being more established, and more profitable than VAT registration. If you want your customers to assume your e-commerce business is thriving and well past the start-up phase, then voluntary VAT registration will often give this impression. By displaying your VAT number on invoices and your website, customers and potential investors may believe your business is larger and more profitable than it really is.

Signing up early also ensure that when your business grows you have the foundations already in place.


Growth as a mindset

Your e-commerce business may be new or in a steady growth stage now, but if you are planning for rapid growth then completing your VAT registration before the fact means you don’t have to be on the constant lookout for the threshold. Beginning with VAT registration and the accounting procedures that go with it will allow you to concentrate on growth without splitting your focus.


Generate more business

A huge advantage of being VAT registered is that it is not unusual for businesses to gravitate towards companies that are VAT registered. This is because being VAT registered gives the impression that you are more established.

Disadvantages of voluntary VAT registration

If your customers are primarily non-business owners, then adding VAT to your prices could make you wholly uncompetitive. You will need to absorb the costs of VAT into your pricing structure in order to keep prices in line with non-VAT registered businesses, and this could seriously hamper your profit margins.

Additionally, if your products are mainly created in-house or are digital goods then you could end up paying a large bill on your income with little to reclaim.

VAT returns

VAT registration also inevitably leads to the need to regularly submit VAT returns. Under the Making Tax Digital initiative, this needs to be dealt with electronically.

The MTD shift should make completing your returns much simpler and less time-consuming, but only if you have the right systems in place. If your e-commerce business is brand new you may not be running your figures through accounting software yet, although we recommend everyone future-proofs their business by implementing the right systems from day one.


Backdating is an option

If you believe you missed the boat with voluntary VAT registration but have been stringently keeping records, you may be able to backdate your registration by up to four years. A single return will be required for the period.

Does it cost more to be VAT registered?

No, there isn’t a VAT registration cost and registering for VAT on the HMRC website is completely free. However, all businesses should be aware that  when filing out your VAT return, there are a number of ways of doing it that can create additional costs.


Why would a company not be VAT registered?

There’s a number of different reasons why a company might not be VAT registered, including the fact that not every sale is VAT liable. At the same time, a business may not be VAT registered due to the fact that their turnover is below the VAT registration threshold.


Help with your decision

If you are still unsure whether VAT registration is for you or need help to set up systems for your e-commerce business, we are happy to help. Unicorn Accounting specialises in e-commerce so let us help you scale your business and have all the legalities in place. Get in touch today.

Why choose Unicorn Accounting?

Ensure you keep on top of your finances and tax obligations by outsourcing to an accountant. This means that you don’t need to worry about your end of year accounts, payroll, or bookkeeping requirements.

At Unicorn Accounting we are e-commerce accountants who help make your online business a growing success. We offer e-commerce accounting advice, financial management, bookkeeping, cash flow statement, and tax filing services to support and scale your business.

Our team of accountants and Xero-certified advisors have experience working with both small start-ups and family-run online stores to large-scale, international retail and e-commerce brands.

If you’ve got an online store, we have the best solution for you. Providing you with a financial arm to your business through our sector experience, and skills with innovative technologies. To see how we can help you maximise the scalability of your e-commerce brand all year roundget in touch with Unicorn Accounting today. Or click here to get a free quote.


The best time to start is now.

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