Research and analysis

Qualitative research on VAT registration findings

Published 26 September 2024

1. Glossary

Term	Definition
Annual Accounting Scheme	A VAT simplification scheme which allows businesses to complete one VAT return each year and pay instalments towards their end of year VAT liability.
Cash Accounting Scheme	A VAT simplification scheme which allows businesses to account for VAT based on payments they receive, rather than on invoices they issue. It can therefore help with cash flow because businesses do not have to pay VAT until their customer has paid them.
Consumer	A person who buys goods and services for his or her personal use. Consumers are not able to reclaim VAT charged on goods and services. This is in contrast to businesses which are registered for VAT which are able to reclaim.
Flat Rate Scheme	A VAT simplification scheme which allows businesses to apply a fixed flat rate percentage to their turnover to arrive at the VAT due. Businesses cannot reclaim VAT on purchases except on a single item of expenditure over £2,000.
Government Gateway	This was a system used to register for the UK government’s online services. The system has been replaced by HMRC online services, where businesses and individuals can log in (using their Government Gateway ID and password) to access their personal and business tax accounts.
HMRC	HM Revenue and Customs.
Reclaiming VAT	VAT can be reclaimed on goods and services bought for use in the business. The VAT is reclaimed in a VAT return.
Registered business, Mandatory	A business which registered for VAT because it was required to. This is because its turnover went over the VAT threshold or was expected to do so.
Registered business, Voluntary	A business which chose to register for VAT voluntarily before its turnover reached the VAT threshold.
Turnover	Turnover is the total sales made by a business in a certain period. For the purposes of VAT registration, taxable turnover is the value of total sales which are not exempt from VAT.
Unregistered business, Borderline	A business not registered for VAT with a turnover of between £75,000 and £85,000.
Unregistered business, Not near the threshold	A business not registered for VAT with a turnover of between £50,000 and £74,999.
VAT registration	This is the process of registering for VAT. A business is required to register for VAT if its turnover exceeds the VAT threshold. Businesses can register for VAT voluntarily.
VAT return	This is a form to tell HMRC how much VAT a business has charged and how much it paid to other businesses. A business usually needs to send a VAT return to HMRC quarterly, in other words every 3 months. A VAT registered business must submit a VAT return even if it has not paid or reclaimed VAT.
VAT simplification schemes	VAT schemes designed to simplify the way some VAT registered businesses calculate and account for VAT to HMRC. They do not change the amount of VAT businesses charge for their products and services. They are voluntary to join.
VAT threshold	The amount of taxable turnover at which a business is required to register for VAT. The VAT threshold was over £85,000 at the time this research was conducted.
VAT	Value Added Tax. This is a tax added to most products and services sold by VAT registered businesses. There are 3 types of VAT rates for goods and services. The first is the standard rate which is set at 20%, which is applied to most goods and services. The second is the reduced rate which is set at 5%, which is applied to some goods and services such as children’s car seats and home energy. The third is the zero rate which is set at 0%. This applies to zero-rated goods and services such as most food and children’s clothes.

2. Executive Summary

2.1 Research approach and objectives

HM Revenue and Customs (HMRC) commissioned Ipsos, an independent research agency, to conduct qualitative research to explore perceptions and experiences of VAT registration. The research also examined linked barriers or pressures on businesses in respect of growth.

Ipsos conducted 39 semi-structured interviews with businesses between 21 July and 16 September 2022. Interviews were carried out by telephone or Microsoft Teams and lasted up to 60 minutes.

The research included both registered and unregistered businesses. The registered businesses had registered for VAT in the past 3 years. There were 2 groups of unregistered businesses. The first group were approaching the VAT threshold and had a turnover of between £75,000 and £85,000. The second group were not near the threshold and had a turnover of between £50,000 and £74,999.

2.2 Knowledge and perceptions of VAT

The research found that there was general agreement about the pros and cons of being VAT registered. However, some businesses struggled to see any benefits. Some businesses thought that the main advantages of VAT registration were reputational benefits, the ability to claim back VAT, and keeping on top of book-keeping.

Some reported disadvantages were additional paperwork, the need to pay an accountant, and having to pass on the cost of VAT to customers. Some businesses said that if customers were not VAT registered, VAT registration resulted in higher prices and made the business less competitive.

Overall attitudes towards VAT registration ranged from regarding it as advantageous to being a ‘nightmare’. There were 3 broad groups of businesses:

• VAT registration was regarded as valuable because of the credibility it provided and the ability to reclaim.

• VAT registration seen as a ‘fact of life’ which does not provide particular benefits for their business

• very negative views of VAT registration because of the impact on their prices and competitiveness

Registered businesses were found in all 3 groups, but unregistered businesses were generally in the second or third group.

Some businesses thought that the VAT threshold should be higher. They felt it caught too many businesses and that VAT registration had a detrimental impact on businesses whose customers were consumers.

2.3 Growth plans and impact of VAT on behaviour

Businesses were asked how their business had fared and what their expectations for growth were. The COVID-19 pandemic had impacted most participants over the past couple of years, often negatively. However most had generally seen at least some improvement in the health of their business more recently.

There were 4 broad groups in terms of future business outlook:

1.Businesses with concrete plans for growth, such as taking on more people or investing in premises.

2.Businesses who were hoping to grow, for instance through word of mouth, but with no specific plans in place.

3.Businesses with no plans to grow and uncertain about their business outlook.

4.Businesses winding down or limiting their growth, either for personal reasons or to avoid the VAT threshold.

In general, many of the businesses that participated in the research were concerned about inflation and the cost of living. Participants were worried about the impact on customer demand and their profitability.

Some had taken steps to keep their turnover below the threshold or were considering doing so. Limiting their income, for instance through stopping work for a period, was the most common tactic. Other businesses were not taking conscious steps but said that VAT registration put them off growing.

2.4 Experiences of being VAT registered

Most registered businesses found registering for VAT unproblematic. Some dealt with the registration process themselves, while others relied on their accountants. This was both to provide advice and to handle the entire registration. Some businesses encountered issues such as delays in receiving their VAT number and difficulties re-registering.

Some registered businesses found that dealing with VAT returns was generally straightforward. Some relied on software to get their VAT returns right. These businesses said that software made VAT administration easier and provided reassurance that returns were being completed correctly.

Some businesses found VAT became easier over time as they became used to submitting returns and got in place their systems such as software and banking apps. VAT continued to be an administrative burden for some participants because of the time required to collate receipts and determine what purchases were claimable.

Most unregistered businesses understood the basics of VAT but had limited knowledge about how VAT registration works. In particular, they were unclear about reclaiming and what the different VAT rates were. Some unregistered businesses found the prospect of being VAT registered daunting. Some were concerned about finding the time, or budget for an accountant, to deal with VAT returns. Some businesses were afraid of making mistakes and being penalised.

2.5 Information and support from HMRC on VAT

Businesses were asked what guidance and support HMRC should provide on VAT registration. Some said they wanted information on the implications of VAT registration for their individual business and guidance on how to get registered. They were strongly of the view that content must be simple to understand. Ideally information should be tailored to a business. Reclaiming, different rates of VAT, and re-registering were 3 areas where guidance was thought to be particularly needed.

The research tested businesses  reactions to different forms of support HMRC could provide. A list of the pros and cons of being VAT registered was generally well received. Businesses thought it would be valuable to understand what the benefits of VAT registration could be. However, some unregistered businesses doubted whether HMRC would be open about the drawbacks.

Most businesses thought a ‘should I be registered’ decision tree would be useful. However, they wanted it to be easy to understand and to help them grasp the implications of VAT registration for their business. Some participants said it would be helpful to include estimates of VAT liability and information on what can be reclaimed. Some also suggested worked examples and a calculator.

A dedicated VAT helpline or webchat for businesses new to VAT was popular, but only if responses were quick, and staff were knowledgeable. Some unregistered businesses had doubts about whether the advice would be personalised enough or correct.

The final idea participants were asked about was a monthly instalment scheme for newly registered businesses. Some participants liked this idea because it would help with cash flow and make it easier to keep on top of VAT administration. Businesses in favour of monthly instalments thought that this option should be available to all VAT registered businesses, not just newly registered ones.

Other businesses thought that monthly payments would be too much work and too complicated. Some registered businesses thought that the current system worked fine. Some businesses had experienced cash flow difficulties when they first registered, but had subsequently got into the habit of putting money aside to pay VAT.

2.6 Encouraging registration and supporting businesses

When asked what would encourage businesses to register, some participants said businesses needed to be persuaded that VAT would be beneficial for them. This was mostly seen in financial terms and the ability to reclaim. However, reputational benefits were also raised. Some businesses thought that the credibility VAT registration could bring was particularly valuable when a business was newly founded or looking to grow.

Some businesses said nothing would encourage them to register for VAT. This was because of the perceived hassle of VAT paperwork, the impact of adding VAT to prices, or because they had no desire to grow.

Businesses identified 3 key areas for HMRC to focus on in encouraging businesses to register for VAT. These were explaining the benefits better, making VAT less daunting, and providing financial incentives such as discounts for quick payment. Suggestions to make VAT registration feel less intimidating included simplifying the system. However, some registered businesses thought it was simple enough already.

Participants did not generally see a role for HMRC in supporting their growth. They felt HMRC should support businesses by providing clear guidance on VAT registration and what its implications were for a business. Some thought that HMRC should be more proactive in providing support. Suggestions included contacting businesses regularly or when they are founded. Some said HMRC should offer more hands-on support and personalised help.

3. Introduction

3.1 Background and objectives

HMRC needs to understand business perceptions and experiences of VAT registration and linked barriers or pressures on businesses. This is to enable HMRC to provide appropriate help and support to businesses in respect of VAT registration.

HMRC commissioned Ipsos, an independent research agency, to undertake qualitative research to explore:

• business outlook and pressures, expectations and plans regarding growth, key challenges, and enablers in relation to growth
• perceptions of VAT registration, understanding of VAT, reasons to register or not register, impacts or perceived impacts of registering, actions, or potential actions to stay under the threshold
• experiences of being VAT registered, what prompted businesses to register, which elements of being registered for VAT are most burdensome, what information has been hard to obtain or understand
• incentives to register, what would encourage businesses to voluntarily register for VAT
• help and support from HMRC, what help is needed before, during and after registration, what support businesses need from HMRC to survive and grow

3.2 Methodology

Ipsos conducted 39 semi-structured interviews with businesses between 21 July and 16 September 2022. Interviews were carried out by telephone or Microsoft Teams and lasted up to 60 minutes.

The research was conducted with 3 groups of businesses:

• businesses that had registered for VAT in the last 3 years (17 interviews in total)
• unregistered businesses approaching the VAT threshold, with a turnover between £75,000 and £85,000 (‘Borderline’ businesses, 16 interviews in total)
• unregistered businesses not near the VAT threshold with a turnover between £50,000 and £74,999 (‘Not near the threshold’ businesses, 6 interviews in total)

The achieved sample is set out in Table 1 in Appendix A.

3.3 Interpretation of qualitative data

By its nature, qualitative research is not designed to be statistically representative. This report is intended to be illustrative of the range of views held by registered and unregistered businesses, providing insight into their perceptions, experiences, and decision-making in relation to VAT registration.

The findings presented in this report reflect only the perspectives of those interviewed and cannot be generalised to a wider sample of registered and unregistered businesses.

Verbatim quotes have been included in this report to illustrate key points and common themes. Where verbatim quotes are used, they have been anonymised.

4. Knowledge and perceptions of VAT

4.1 Knowledge of VAT

Most unregistered businesses understood the basics of VAT: that you charge 20%, VAT needs to be charged on your sales, and VAT can be claimed back.  Although the exact threshold was often guessed wrongly, participants were generally not far off the correct figure.

Knowledge about VAT and in particular, reclaiming VAT, was vague among unregistered businesses. They did not know how this would work, what you could claim for and when you would get payment.

The extent to which unregistered businesses had thought about VAT varied. Some had looked into it or talked to their accountant (sometimes at the accountant’s prompting). Others had not thought about it.

“It is something I keep parking. It is probably something I should do but you just keep putting it off” (Unregistered business, Borderline)

4.2 Attitudes towards VAT

There was general agreement about what the pros and cons of being VAT registered were. However, some businesses struggled to see any benefits to being VAT registered.

“It just all seems negative…. It just sounds like an absolute headache” (Unregistered business, Borderline)

Businesses identified 3 key benefits to VAT registration. Firstly, it can give a business credibility and provide reassurance to potential customers and suppliers. It can make the business seem reputable, established, professional and successful. It can help businesses win bigger clients and contracts.  Secondly, the ability to claim back VAT paid on materials and business expenses. Thirdly, it can help businesses keep on top of their book-keeping. This advantage was only mentioned by registered businesses.

“Once you are fully registered you can compete as it sends a signal that your business is fully established” (Unregistered business, Borderline)

In terms of drawbacks, some businesses raised the additional paperwork needed to do returns and keep records of receipts. Some commented that many of those running small businesses were time poor. Another potential disadvantage could be that businesses may need to pay their accountants more.

“Pointless, just additional admin. Taking up more of my time that I could be putting into the business” (Registered business, Mandatory)

A key negative raised by some was having customers who were consumers who could not reclaim VAT. This increased prices and made the business less competitive, particularly if competitors were not VAT registered.

“I’ve got to put my day-to-day prices up and the concern is that I will lose business as a result of it” (Unregistered business, Not near the threshold)

Finally, some unregistered businesses were concerned that VAT registration may negatively impact their cash flow. They were worried about having sufficient funds in place to pay VAT because of customers paying late or defaulting. Another concern was the prospect of having to pay a big bill at the end of the quarter.

Overall attitudes towards VAT registration ranged from regarding it as advantageous to being a ‘nightmare’. Broadly speaking, businesses fell into 3 groups:

1.Valuable to the business. For some businesses, VAT registration was advantageous because of the credibility it brought and the ability to reclaim VAT. This was particularly the case when businesses were starting out and could benefit from projecting a professional image and reclaiming VAT on their initial outlays.

“If you weren’t registered for VAT you’d just look small fry and I think in the industry we’re in, we probably wouldn’t be considered for any decent amount of business even if somebody had tested us and thought the service was good” (Registered business, Voluntary)

2.A ‘fact of life’. These businesses saw VAT registration as a fact of life; once you hit the threshold you must register. They recognised (some grudgingly) that governments have to raise taxes. They had mixed views on the administrative burden but generally felt it was not worth the effort of registering until they had to. They recognised that VAT registration had advantages but these were not especially beneficial to them.

“I haven’t avoided registering for VAT, but I would leave it until I had to register for VAT because it’s just an extra hassle for me. It takes me away from directly working (Unregistered business, Not near the threshold)

3.A big problem. These businesses were very negative about the impact VAT registration had or could have on their business. It meant increasing what they charged their customers which made them vulnerable to losing business. Unregistered businesses in this group assumed that VAT paperwork would be a headache, but this was a secondary concern. These businesses tended to have consumers as customers and to have competitors who were unregistered.

“If I thought we could get 20% more I would charge it, but there would be lots of abandoned [online shopping] carts” (Unregistered business, Borderline)

Registered businesses were found in all 3 groups, but unregistered businesses were generally in the second or third group.

“What would have been £1,000, then I’m going up to £1,200. If I charge £1,200 then the next man down the road who’s under the VAT threshold, another one-man band plasterer like myself, goes in and quotes £1,000, and I’m the £1,200 because I’m charging VAT, then I’m going to lose out on work, aren’t I?” (Unregistered business, Borderline)

4.3 Views on the VAT threshold

Businesses generally thought that the threshold should be higher, with suggestions ranging from £100,000 to £150,000. Linking the threshold to inflation was another suggestion. 

Businesses felt the threshold was too low because it catches too many businesses, with some mentioning expenses and turnover rising because of inflation. There was also a sense among some unregistered businesses that they were too small to be VAT registered. Another factor raised was the detrimental financial impact on businesses whose customers are consumers.

The few businesses who said that the current threshold was fine were not financially impacted by VAT. No one said it should be lowered.

“It feels like the scale of the business and the VAT threshold are not in proportion anymore. 10 years ago it was £76,000 or something like that and we felt miles away from that. But now our business hasn’t really expanded and we are above the threshold” (VAT registered business, Mandatory)

There were mixed views on whether profit would be a better way to determine registration. This suggestion was more popular with unregistered than registered businesses.

Those who favoured it felt that a system based on profit would be fairer. This was particularly for businesses with high turnover and low profits or businesses with consumers as customers. Unregistered businesses distinguished between profit, which they equated to their earnings, and turnover.

“That [profit] would make more sense, I suppose. You’re not making any money on materials really, are you? The turnover being high doesn’t necessarily mean that you’re rolling in the big bucks…. turnover to me, a lot of that is dead money in my eyes” (Unregistered business, Borderline)

But other businesses were concerned that using profit would be too complex and also open to fraud. Using turnover was thought to be more straightforward.

Using some sort of personal allowance was also regarded as too complicated and many did not understand how this could work. Some favoured it on the basis that this would allow them a certain amount of profit or earnings before having to pay tax.

“The thing I like about VAT is that it is quite simple to understand. If you start adding in too many different allowances and that sort of thing, it makes it more complicated for businesses to understand and also increases the likelihood of mistakes and abuse” (Registered business, Voluntary)

4.4 Awareness of and perceptions of VAT simplification schemes

There was mixed awareness of VAT simplification schemes among both registered and unregistered businesses. Some had not heard of any of the 3 schemes asked about or only 1 or 2, while others were aware of all of them. Awareness was generally low among unregistered businesses.

The Flat Rate Scheme was the best known scheme. It had mixed appeal and some registered businesses were using it. Its simplicity was a plus, but others felt it was not appealing because of the restrictions on reclaiming.

The Cash Accounting Scheme was not relevant for some businesses who did not experience any delays in payment. Businesses that did experience delays thought it would help with cash flow.

The Annual Accounting Scheme was the least well-known scheme. Some businesses would rather operate quarterly and disliked the idea of doing the accounts all at once every year. However, others liked being able to pay in instalments and not having to face 1 large bill at the end of the year.

4.5 Sources of information about VAT

Gov.uk was the most commonly used source (or potential source) about VAT. Generally, businesses were positive about the site, which was regarded as a trusted source of information. However, some said information could be confusing and hard to find.  

“I do tend to think what they put on Gov.uk is very informative and helpful. Sometimes you go around in circles a bit because you click on the next step and you seem to end up back where you were 3 steps ago” (Registered Business, Mandatory)

Accountants were a key source of information and support for some businesses. They were valued for taking away the burden of tax paperwork and were trusted to get things right.

“He is really good. I don’t tend to get into the realms of that [tax] very much, I leave it to him” (Unregistered business, Borderline)

Businesses often sought or came across tax advice through personal and business networks. Another source was forums used for their business.

“Only on [platform], you’ve got builders’ talk group pages …every now and again you’ll get someone ask a question about it. And then you’ll just be nosey really and just read the comments. I’ve learnt a little bit through that” (Unregistered business, Borderline)

Some unregistered businesses said that their first port of call would be an internet search. Businesses used Google to get to the relevant page on Gov.uk.

Software was a helpful source of information and guidance for registered businesses, and some used software company forums for advice about VAT.

5. Growth plans and impact of VAT on behaviour

5.1 Business experiences and outlook

The COVID-19 pandemic was the most commonly raised factor when businesses discussed how their business had fared over the last year or so. Its impact varied from moderate to ‘massive’, with some unable to trade at all.

For some though, the pandemic was actually good for business, either because demand for their products or services increased or because they changed what they offered customers.

Since the end of the pandemic, most participants who had been negatively impacted had seen an improvement in the health of their business. This contributed to a sense of optimism around their business prospects. Many reported that they expected their business to grow in the long term.

“We are trying to claw our way back. There is, or there was, a huge marketplace for this. There are signs that it is starting to reappear” (Unregistered business, Borderline)

EU Exit was much less of a factor but among the few businesses who did raise it, the impacts were generally negative. These participants cited rises in cost of materials and decreases in demand.

Business outlook towards growth varied and was shaped by a mix of business, personal, and economic factors. There were 4 broad groups of businesses:

• businesses with concrete plans for growth, such as taking on more people or investing in premises
• businesses who were hoping to grow, for instance through word of mouth, but with no specific plans in place
• businesses which had no particular plans to grow and who were uncertain about their business outlook
• businesses who were winding down or limiting growth for personal reasons (for example approaching retirement) or to avoid the VAT threshold

“There are things in the pipeline, but we’re of an age now where we’re thinking, ‘Do we actually want that?’ Because it often involves being away from home for quite a long time and things like that. So, we’re not stopping work, but at the moment we’re not taking any big jobs on” (Registered business, Mandatory)

Businesses were hoping to grow in a range of ways. This included referrals, networking, advertising, winning new customers or contracts and taking on more staff.

However, there was a clear sense of concern and uncertainty about the current economic climate among many businesses. Inflation was a particular anxiety. Some businesses were fearful of customer demand falling. They were also worried about the impact of increasing costs on their prices and profitability.

“If people still want something they’ll pay for it. But when the winter comes and everyone can’t afford central heating and electricity…what will happen? People won’t be able to spend as much on luxury items. It’s all up in the air at the moment” (Unregistered business, Borderline)

Conversely, some businesses were more philosophical. They had not yet seen a downturn in demand and hoped that their business would continue to thrive.

“I don’t want to have to get to the point where I increase my prices. The electric isn’t too bad at the moment but who knows? I try to be optimistic that something is going to come along” (Unregistered business, Borderline)

5.2 Impact of VAT on growth plans

Some unregistered businesses wanted to limit their growth to avoid having to register for VAT. Some were taking, or considering, deliberate steps to keep their turnover below the threshold.

This was generally through limiting their income. The tactics used were stopping work for a month or 2, pretending to be on holiday, or taking their website down temporarily. Another approach was asking customers to buy materials. However, this was seen as a hassle and could also mean losing a trade discount or mark-up, albeit a small one. Some registered businesses had also done this.

“Because I knew roughly how much I earned and spent last year, I’ve kept it in the realms of last year without having to turn work away…. Instead of saying I can’t do something I would say I am on holiday for a whole month. That sort of thing” (Unregistered business, Borderline)

Other businesses were not taking conscious steps to limit their growth but said that VAT registration put them off getting bigger. Some businesses said they wanted to be well over the threshold for it to be worth the hassle of VAT registration. One participant mentioned a specific figure of £200,000.

“I would want it a good way over the threshold to bring in all the headaches it would involve” (Unregistered business, Borderline)

Most registered businesses were not attempting to reduce how much VAT they paid. Registered businesses generally saw no reason to avoid VAT registration or limit their liability.

“As of right now, I don’t see us changing the process right now to avoid VAT because the VAT process is straightforward for us…. there is no reason to invest time in finding ways to not pay VAT” (Registered business, Mandatory)

Setting up separate companies was something some registered and unregistered businesses had considered. Registered businesses were not considering this for reasons related to VAT. They were concerned that setting up different companies would be ‘dodgy’ in some way.

“I have heard about this, where you have 2 separate companies, so you’re kind of quoting and billing and stuff like that under 2 separate ones. I don’t really know, I’m not an expert on it. But that to me could potentially make sense as opposed to trying to charge customers VAT” (Unregistered business, Borderline)

In general, businesses taking part in the research wanted to comply with tax laws. Some gave specific reasons for not accepting cash in hand such as their reputation or planning to apply for a mortgage.

6. Experiences of being VAT registered

6.1 Reasons for registering for VAT

Some businesses taking part in this research who registered voluntarily did so for the reputational benefits, often when the business was set up. Being able to reclaim VAT was an added benefit but was not decisive, even though it could be significant when a business was starting up. One business registered to be able to reclaim because their business expenses were high, and another had to register under the terms of their franchise.

“It gave a message to the market I’m probably slightly larger than I am… [reclaiming] was very helpful as a start-up business, so it definitely had double benefits” (Registered business, Voluntary)

Among the businesses who registered because they hit the threshold, some saw this coming and proactively registered. Others realised when they did their tax return or were prompted by their accountant.

“It kind of crept up on us because we’d been ill. It is such a small business and we usually have just one job on” (Registered business, Mandatory)

6.2 Experiences of registering for VAT

Most businesses found registering for VAT unproblematic. Some businesses handled the registration process themselves, while others relied on their accountants, both to provide advice and to take care of the entire registration.

Those who did the registration themselves generally found it to be straightforward. Some had previous experience of being VAT registered or were not daunted by the prospect. Others approached it with some apprehension.

“It was relatively simple. You just had to read all the information and then sign the self-declaration” (Registered business, Mandatory)

Although registration was generally smooth, some businesses encountered issues:

• delays receiving their VAT number
• re-registering was challenging due to difficulties re-activating their previous VAT number and conflicting advice from HMRC
• difficulties using the Government Gateway log in
• how to deal with invoices issued before registration, as businesses said there was little information on this

There were a couple of suggestions to improve the process by simplifying the registration form and making registration more automated, for instance in receiving the VAT number.

6.3 Experiences of being VAT registered

Some businesses found that dealing with VAT returns was straightforward. Some businesses relied on software or accountants to get their VAT returns right. In some cases, the accountants submitted the VAT returns, while in others they were a source of advice on specific queries. Examples of these were how to deal with invoices that had been issued before registration but not paid and how to invoice non-UK clients.

Some businesses who used software said that it made VAT administration easier. The ability to link to HMRC systems was seen to be beneficial and software provided reassurance that returns were being completed correctly. Some were already using software pre-registration, but others began doing so when they became registered. Some calculated their VAT manually using spreadsheets.

“I would say in 2022 administratively VAT couldn’t be easier to use. As long as the company’s accounts are all automated and you’re doing the right thing and you’re keeping an eye on what you’re processing each month” (Registered business, Voluntary)

Some businesses found VAT became easier over time as they became used to submitting returns and got their systems in place. Examples of this were getting their software connected to HMRC, using banking apps to keep track of receipts, and setting up spreadsheets. Businesses also became less fearful of making mistakes.

“It was just getting our heads around it. To begin with we were a bit haphazard and it was taking forever to scrabble about and get receipts. Now we’ve got better systems in place” (Registered business, Voluntary)

VAT continued to be an administrative burden for some businesses, with reclaiming VAT the main source of difficulty. This was due to the time required to organise receipts and to ascertain what purchases were claimable.

“Although VAT is pre-filled by account software and I just press a button, I do have to go through each individual incoming and outgoing payment and check whether I should claim VAT, which could be 200 to 300 payments a month. Actual categorisation can be a morning’s work” (Registered business, Mandatory)

Some businesses ran into issues on reclaiming, such as:

• dealing with digital advertising expenses where the company was not UK-based
• what can be claimed from before registration or on the first return as the information on this seemed to be contradictory
• whether energy expenses could be claimed
• how reclaiming works with the Flat Rate scheme and what items can be claimed for
• understanding VAT rates for different services and products

Other than these issues, reclaiming was felt to be mostly straightforward once businesses were familiar with what they could claim.

“The first VAT return was quite difficult because we didn’t know what we can claim back… We spoke to our accountant because we couldn’t find that info online. It took quite a long time and we had to find out whether we have to pay VAT on behalf of [digital advertising platforms] because they are not UK-based companies and you have to pay VAT on their behalf” (Registered business, Mandatory)

6.4 Impact of VAT registration on cash flow

Businesses said they were not currently encountering cash flow difficulties because of VAT registration. Participants most commonly managed cash flow by setting money aside from each invoice. Some used specific accounts which they had opened for this purpose.

Some businesses had run into cash flow difficulties when they first registered for VAT. In one case this was because of a mis-match between payment times for customers and suppliers. In another, the size of the first VAT bill came as a shock. These businesses dealt with their cash flow problems by taking out a loan or getting a payment plan set up. They subsequently got into the habit of putting money aside to pay their VAT.

“Initially the bill was really big, a large amount…. the bill was a shock and I had to set up a payment plan” (Registered business, Mandatory)

6.5 Perceptions of VAT registration among unregistered businesses

Some unregistered businesses regarded the prospect of VAT overall as daunting, for instance describing it as complex, a headache, stressful or a minefield.

Unregistered businesses generally had little knowledge about what the process of registering for VAT would involve. Most assumed it would be online. While some did not have particular concerns about the process, others feared it could prove challenging. Some said they would simply leave it to their accountant. 

“I wouldn’t know. I would think my accountant would do that for me” (Unregistered business, Borderline)

Participants were often concerned about having the time and ability to deal with VAT returns. Those who would use an accountant had reservations about the cost of this.

Unregistered businesses had several questions and worries about how VAT registration would work in practice:

• how to reclaim
• understanding the different VAT rates
• what happened if you go below the threshold the following year
• what jobs you need to charge VAT on if you hit the threshold

Some businesses were particularly fearful of making a mistake and being penalised. This contributed to their perception of VAT being a headache.

“You hear the scare stories of people who are VAT registered who feel like they may not have done it right, they’ve been unsure and then they’ve been landed with a big VAT bill” (Unregistered business, Borderline)

7. Information and support from HMRC on VAT

7.1 Spontaneous suggestions

Participants wanted information on the implications of VAT registration for their business and guidance on how to get registered. Suggestions included an easy start guide or a ‘welcome to the scheme’ letter, with links, tutorials, and what to do if there were difficulties.

“A run through - if they showed you how to do the form, like put your screen up and fill it in for you even with fake numbers so you knew what to do” (Unregistered business, Borderline)

The specific information businesses wanted on VAT generally related to areas where some businesses had difficulties or were uncertain:

• information on reclaiming, for example a searchable list that tells you what you can claim VAT on
• guidance on different rates of VAT
• re-registering, which had been challenging for some registered businesses
• the implications of going over and under the threshold in different years

“There are some things that aren’t claimable and sometimes those bits of information are quite hard to find” (Registered business, Mandatory)

• There was a strong desire among participants for content to be written in simple language and to be digestible (for example bullet points and images). Participants also said information should be easy to find.

“Anything tax-based or from HMRC is very wordy and you sometimes feel a bit stupid.” (Unregistered business, Borderline)

• Participants preferred information which was relevant to their business. Some suggested scenarios and examples which were tailored to their sector and type of business.

7.2 A list of the pros and cons of being VAT registered

This idea was generally well-received. Some businesses thought it would be useful to know what advantages there may be to VAT registration. However, some unregistered businesses were sceptical that HMRC would be open about the drawbacks of registering for VAT.

“It would be good to see a list of pros and cons because to my mind it is all about the Government clawing money back” (Registered business, Mandatory)

Some businesses questioned whether there were any pros and others thought there was no point in providing this information because VAT registration is mandatory.

“I could try it but I can’t see there being many pros, to be honest” (Unregistered business, Borderline)

7.3 A ‘should I be registered’ decision tree

This was explained to participants in the interview as follows:

“A ‘should I be registered’ decision tree which helps businesses understand whether they should register and implications of VAT registration on their individual business. You fill in a set of questions about your business such as type of sales and customers.”

Most businesses thought this would be helpful. They wanted the decision tree to be simple to use and easy to understand. Suggestions included using diagrams, fewer words, or bite-sized content.

“Answers need to be in plain English” (Unregistered business, Borderline)

Some participants thought that the value of the decision tree would be in helping businesses understand the implications of VAT for their individual business. Some said the decision tree should be tailored to different sectors and scenarios, so the most relevant information was provided.

Some businesses also suggested worked examples and a calculator, saying this would help them visualise what VAT would mean for them.

“It would be useful to know if it’s going to be a good or a bad thing financially (Unregistered business, Borderline)

This was the specific information which businesses said would be helpful to include:

• estimation of VAT liability
• what can be claimed
• what happened if mistakes were made (with worked examples) or if payment was late
• an explanation of VAT simplification schemes
• VAT rates on different products and categories
• some sort of forecast of when the business was going to hit the threshold

“Estimates when you hit £85k, estimates when you hit £100k, £120k, £150k turnover so you can see what it means to you in real terms as the business develops and grows” (Unregistered business, Borderline)

7.4 Dedicated VAT helpline or webchat for businesses new to VAT

This was a popular suggestion, although some businesses were wary of long call waiting or response times. This was often because of previous HMRC or government experience.

Some had definite preferences for a helpline or webchat, with the helpline option being more popular. The perceived advantages of a helpline were being able to talk to someone and a more personalised approach. The disadvantages were felt to be that it may be intimidating speaking to someone and a perception that calling could take a long time. Some said they would need to set aside time for the call.

Businesses who favoured webchat liked the ability to print out the chat and to multitask during the chat. Some thought that it would be useful for questions which can be answered by sending a weblink to the relevant information. Another suggestion was using webchat to guide someone through the process of registration. A downside of webchat which some raised was that it can take longer because of the need to type things out.

For both the helpline and webchat, businesses wanted quick responses and knowledgeable staff. Some unregistered businesses doubted whether the advice would be personalised enough or that HMRC would be willing or able to give correct information.

“If you could make it clear that you are going to get through straight away and actually speak to someone who knows about VAT, that would be helpful” (Registered business, Mandatory)

7.5 Monthly instalment schemes

This was explained to participants in the interview as follows:

“Normally, a business would submit a quarterly VAT return and pay the full amount due at the same time.  To what extent could it help newer businesses if they could pay monthly instalments, with HMRC adjusting any over or underpayments each quarter?  This could be either: 1. after the return was submitted, based on one-third each month of the declared tax. 2. before the return is submitted. This could be based on one-third each month using the previous quarter’s tax due or could reflect how much is owed for each month’s trading from your own records.”

There was a mix of views on monthly instalment schemes for newly registered businesses. Some businesses who found this idea appealing thought that it could help with cash flow, particularly for businesses which were struggling. A related point was that monthly payments could be less daunting. Some felt that it would be easier to keep up to date with VAT and this would make VAT administration easier. Some pointed out that businesses are used to doing things monthly.

“I like the sound of monthly instalments and then underpay or overpay when it is due because it spreads out these massive lump sums that you have to outlay, and I suppose it makes it easier to keep track of everything” (Unregistered business, Borderline)

Some businesses who were not keen on this idea thought that monthly instalments would be more work and difficult to understand. Registered businesses in particular thought that the current system worked fine. Some said that it was better to get their quarterly payments out of the way and businesses with variable income preferred quarterly payments.

Some were wary of giving estimates, so the ‘before’ option was less popular. Other than this, there were no strong views on whether calculating the amount before or after the return was submitted would be better.

Businesses who favoured monthly instalments felt that this option should be available to all businesses, not just newly registered ones.

“The ability to pay monthly is huge. Most businesses work month to month. If you’ve got that ability to pay monthly, it becomes less of a concern. £800 a month sounds a lot better than 3 or 4 grand a quarter. It should be available for everyone” (Unregistered business, Borderline)

8. Encouraging registration and supporting businesses

8.1 Encouraging businesses to register for VAT

Participants said businesses needed to be persuaded that VAT would be beneficial to them if they were to be encouraged to register. This was mostly seen in financial terms, in particular the benefits of reclaiming.

“If it was easier to register and learn about the process and be confident about doing it right and it transpired that it would save the business money, then it is a no-brainer to do it” (Registered business, Mandatory)

Some also mentioned reputational benefits. The credibility VAT registration can bring with both clients and suppliers was seen as particularly relevant for start-ups or businesses looking to grow.

Some businesses said they could not be encouraged to register. One reason given was that they were not intending to grow and did not want the hassle of VAT. Another reason was that VAT would make their business uncompetitive because they would have to increase their prices to consumers. They said they did not want to change their business model or customer base to counter this.

“Do I as a result actually have to lower my prices and therefore have more work to do with the VAT stuff, and I’m worse off? It doesn’t seem like a good trade off to me” (Unregistered business, Not near the threshold)

When asked what HMRC could do to encourage businesses to register for VAT, businesses identified 3 key areas. These were explaining the benefits better, making VAT less daunting, and providing financial incentives.

Some businesses said that HMRC should explain the potential advantages of VAT, both in general and in relation to their individual business. Information about reclaiming VAT would be particularly helpful. Some businesses commented that focusing on benefits could help shift perceptions of VAT as simply a burden.

“Especially when you are starting up, you are going to be outlaying stuff so you are going to get that VAT back. They could be better at explaining the benefits of it” (Registered business, Voluntary)

Businesses made a range of suggestions to make VAT less daunting:

• simplifying the VAT system, although some registered businesses felt it was simple enough already
• de-mystifying the process of registering and being registered
• providing support in filling out the registration form
• giving some leeway to people new to VAT, for instance a forgiveness period for any errors in the first year

“I don’t know how much simpler [HMRC] can make it. At the end of the day, if I can understand it then I don’t really see why anyone else can’t” (Registered business, Voluntary)

Some businesses suggested financial incentives or support such as discounts for quick payment or periods where less VAT would be payable.

8.2 Spontaneous suggestions on help with cash flow

There were a number of  suggestions on how HMRC can help businesses with their cash flow. These were:

• more information on what you can reclaim VAT on
• estimates of how much VAT you owe through software or an online calculator
• the option to pay credit on account
• notification that direct debit payments were going to be taken
• general information on how to manage cash flow better

8.3 Supporting business growth

Some businesses did not see a role for HMRC in supporting their future growth. Those that did talked in broad terms about HMRC ensuring economic growth or reducing taxes. Some unregistered businesses thought advice on growth could be helpful.

More commonly, businesses said that HMRC should support businesses by providing clear guidance on VAT and its implications for a business. Some registered businesses said HMRC should provide reassurance that VAT is not as difficult to administer as businesses may think. Some unregistered businesses wanted HMRC to raise the VAT threshold.

“Doing VAT online is really easy. They could maybe do more to reassure people who are new and help them on the way. On the whole our experience of doing VAT has been pretty easy and pretty positive” (Registered business, Mandatory)

Some businesses felt that HMRC should be more proactive in providing support on VAT registration. For instance:

• providing information about VAT when businesses were set up
• emailing registered companies regularly (for example annually)
• letting businesses know when they were approaching the threshold
• checking in with newly registered businesses to see if they need any support or guidance
• more hands-on support and personalised help

“It is a personalised touch, like a phone call, to help guide a business through it. It could be just to say ‘have you spoken to your accountant about it’ or an email to say ‘we’ve noticed your turnover is creeping up towards the VAT threshold, here’s what you need to do’” (Unregistered business, Borderline)

9. Appendix A: Method

Ipsos carried out 39 semi-structured interviews with businesses between 21 July and 16 September 2022. Interviews took place over the telephone or Microsoft Teams and lasted up to 60 minutes.

Interviews were conducted using topic guides. A separate guide was developed for registered and unregistered businesses. Both guides covered business outlook, perceptions of and behaviour in relation to VAT, and support and guidance required from HMRC. The guide for registered businesses looked at experiences of VAT registration and the impact of being VAT registered. The guide for unregistered businesses explored perceived impacts of VAT registration.

The following groups of businesses were included in the research:

• businesses that had registered for VAT in the last 3 years
• unregistered businesses approaching VAT threshold, with a turnover between £75,000 and £85,000 (‘Borderline’ unregistered businesses)
• unregistered businesses not near the VAT threshold with a turnover between £50,000 and £74,999 (‘Not near the threshold’ unregistered businesses)

The sample for this project came from the following sources:

• registered businesses were recruited using HMRC’s VAT administrative records
• unregistered businesses were recruited using a combination of HMRC’s Self-Assessment and Corporation Tax records and free-find recruitment

A spread of interviews was achieved in terms of business growth outlook, sector, length of trading, and region.

Ipsos also set quotas by type of VAT registration (mandatory or voluntary) and legal status (company or sole trader/partner). The split across the interviews was as follows:

9.1 Table 1: Overall sample

Quota category	Number of interviews
Newly registered businesses (registered in the last 3 years)	17
Unregistered businesses: ‘Borderline’, approaching the VAT threshold (turnover £75,000 to £85,000)	16
Unregistered businesses: ‘Not near the threshold’ (turnover £50,000 to £74,999)	6
Total	39

9.2 Table 2: Sample breakdowns for Newly registered businesses

Type of business	Number of interviews
VAT Registered (mandatory)	10
VAT Registered (voluntary)	7
Company	13
Sole trader	4

9.3 Table 3: Sample breakdowns for ‘Borderline’ unregistered businesses

Type of business	Number of interviews
Company	5
Sole trader or partner	11

9.4 Table 4: Sample breakdowns for ‘Not near the threshold’ unregistered businesses

Type of business	Number of interviews
Company	5
Sole trader or partner	1