Research commissioned by HMRC into business behaviour in relation to value added tax (VAT) registration looked into reasons why businesses register for VAT and their awareness of various aspects of VAT.

The survey found that VAT registered businesses were more likely than unregistered businesses to be making most of their sales to other businesses. This is especially the case with businesses that registered voluntarily for VAT. Most unregistered businesses on the other hand make most of their sales to unregistered businesses or individual consumers.

The survey revealed that 67% of VAT-registered businesses saw accountants as their most common source of advice on VAT. Also 57% of unregistered borderline businesses had requested advice on VAT from an accountant. An unregistered borderline business was defined for the purposes of the survey as a business that was not registered for VAT and had a turnover up to GBP 7,000 below the VAT threshold in 2012/13 and 2013/14.

14% of registered businesses and 11% of unregistered borderline businesses had requested advice from HMRC and the majority had found the advice useful. The sections of the UK government website relating to VAT were also useful to businesses. Experience of the helpline was however more mixed.

The survey found that there was high awareness among registered businesses of most aspects of VAT such as the requirement for accurate and timely VAT returns, the possibility of reclaiming VAT and the record-keeping requirements. The VAT awareness of unregistered borderline businesses was however more mixed and more than one quarter of those businesses did not know the current VAT threshold. Around a quarter of the unregistered borderline businesses did not know that businesses can reclaim VAT. They showed great uncertainty as to whether the VAT is only due once the invoice has been issued or if overseas customers must be charged VAT.

The survey looked at reasons why businesses registered for VAT. Around 26% of businesses registering voluntarily did so because they expected to soon reach the VAT turnover threshold and 20% registered owing to advice from their agents. 13% cited the ability to reclaim VAT as the main reason for registering. It appears that some businesses registered as a precaution because they were expecting to grow quickly and wanted to ensure they were in line with the VAT regulations. Most businesses registering mandatorily gave the VAT turnover threshold as their main reason for deciding to register.

33% of the voluntarily registered and 27% of the mandatorily registered businesses gave the ability to reclaim VAT as the main reason for registering. The second most common reason given was improved reputation or improved credibility.

The most commonly cited disadvantage of VAT registration was the additional administrative burden. Research suggested however that administration was not too onerous. Compiling quarterly returns was the main burden mentioned. The need to increase prices for VAT or suffer reduced profits was also mentioned as a drawback. The survey found that 52% of businesses kept their prices the same after registration while 25% increased them (and the other 23% were registered from the start so did not have to take that decision).

The survey found that 46% of the businesses used the VAT flat rate scheme; 15% used the cash accounting scheme and 5% used the annual accounting scheme. The usage of the schemes was seen as positive. The main advantage of the flat rate scheme was seen to be the removal of the need to determine the different VAT rates and avoid the need to record how much VAT was paid. The main reason for businesses not using one of the schemes was lack of awareness or understanding.

Around 20% of the unregistered borderline businesses surveyed admitted they had taken some action to stay under the VAT threshold. Methods used to restrict turnover included closing the business for a time; stopping advertising; turning down work; asking customers to purchase their own materials; reducing prices of products; splitting the business by operating as a separate legal entity or artificially separating the business by product or service. 78% of the borderline unregistered businesses would find it difficult to increase prices to cover VAT charges and this was a major barrier to registration.