Ipsos MORI conducted a combined quantitative and qualitative study with over 2,000 companies examining why small businesses register for VAT and their perceptions and experiences of doing so.

This found that overall, 20% of unregistered borderline businesses admit to having taken some action to remain under the threshold and outside the VAT system. The most common approach was closing the business or stopping advertising (47% of those restricting turnover admitted this), 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%).

The biggest reason for doing this was cited as the difficulty of increasing prices to cover VAT charges (78%). 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, with businesses with a higher proportion of business-to-consumer sales and low input costs worried about a substantial financial impact.

The research found that restricting business activity often involved considerable effort and monitoring of turnover, and turning down work could impact on a business’ reputation.

The study also found that 63% of unregistered borderline businesses never expect their business to reach a turnover of £82,000 (the current VAT threshold) - only 7% think it will take up to one year and a further 17% say it will take between one and three years.

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.

Advice sources

Accountants were the most common source of advice on VAT (67% of registered businesses got information from an accountant when deciding to register and 57% of unregistered borderline businesses have sought information on VAT from an accountant).

Far fewer businesses engaged directly with HMRC - 14% of VAT registered businesses and 11% of unregistered borderline businesses, although when they did so they reported finding the advice useful. Businesses found the VAT sections of the gov.uk website helpful, but experience of the helpline was more mixed.

In general, awareness of different aspects of VAT is very high, including the need to submit accurate returns on time, the ability to claim back VAT and the requirement of additional record keeping.

However, 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, only just over a quarter (28%) 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.

Additional administrative burden 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, most businesses kept their prices the same (52%) although 25% did increase them (23% were VAT registered from the start). Virtually all businesses paid their VAT quarterly (98%) and most accepted the stagger period they were allocated when they first registered – only 5% recalled ever requesting a different one.

Of the three VAT support schemes asked about, usage was highest for the flat rate scheme (46%), followed by the cash accounting scheme (15%) and annual accounting scheme (5%).

A majority agreed that businesses which use illegal means to avoid paying VAT are likely to be caught; with unregistered borderline businesses more likely to have this view (79% compared to 67% of registered businesses).

Behaviours and experiences in relation to VAT registration is here.

Report by Pat Sweet