VAT and small businesses – some advice please!

The VAT threshold is 79k. if a small business which takes it’s entire income from VAT eligible services is making less than this and is not VAT registered then grows to 79K, i assume it pays 20% of it’s profits straight to the govt?

so potentially the business makes 20% profit at 75k would then make zero profit at 79k.

Have I got this right?

I think it’s worse than that – you become Vatable if your income any in one month takes you over £79k/12. So one good month can be a problem.

Don’t forget you’ll also be charging VAT on any invoices raised so it’s not just comign straight off your bottom line.

Does make a difference, though. My (new) business is going to stay VAT free as long as I can. Less hassle.

Anyway, if I’m earning 76K, I’ll just put my feet up – can’t see why I’d want to work any harder 🙂

Rachel

If you use the flat rate scheme, though, the admin is minimal, and the government gives you free money every quarter.

What’s not to love?

“if I’m earning 76K,”

vat is turnover not earnings.

If you use the flat rate scheme, though, the admin is minimal, and the government gives you free money every quarter.

Only if input > output vat

The VAT threshold is 79k. if a small business which takes it’s entire income from VAT eligible services is making less than this and is not VAT registered then grows to 79K, i assume it pays 20% of it’s profits straight to the govt?

so potentially the business makes 20% profit at 75k would then make zero profit at 79k.

Have I got this right?

I’ll take it. Short answer no.

Long answer is once you’re over the threshold you charge VAT on your invoices. So if you would have charged someone £100, you now charge them £100+VAT, i.e £120

At the end of each quarter HMRC collect all the VAT you have charged your customers. This is output VAT.

On the flip side, on all the costs you incur from say other suppliers, you can claim back, or offset, the VAT against the output VAT above.

So the net you pay each month is output VAT – input VAT. This can be negative and a refund.

Probably the main issue for larger business is the quarterly nature of payments and the impact on cash flow.

Regarding profit, VAT is profit neutral.

Think about who you sell to – in simple terms…

If you sell to businesses then VAT isn’t an issue for them as they just reclaim the VAT. Businesses always work on the pre-VAT price.

If you sell to the general public who can’t claim the VAT back then you will be 20% dearer than other sole traders who aren’t VAT registered.

ok i’ll qualify this a bit more.

currently the business has a rate for it’s services which is acceptable. customers would not be best happy with a 20% prcie increase to cover VAT and could lose them.

so the business would need to abosorb the costs of VAT. So the only place I see that coming from is profit. Input VAT is very small as the business is service based with little costs of VAT chargeable materials.

We’re a little way off this but could become an issue in a few years time..

Only if input > output vat

Agreed, but if you have any big ticket items > 2K then you can claim those separately, and depending on the main focus of your business the actual flat rate varies to fall in your favour. I’d be massively surprised if 9/10 businesses didn’t benefit from it.

Who are you selling to, public or businesses?

currently the business has a rate for it’s services which is acceptable. customers would not be best happy with a 20% prcie increase to cover VAT and could lose them.

If you are selling to the public are there other, bigger companies offering the same thing at the same price? If so they must be charging VAT. If this is the case either you have a high expectation for your profit margin or your costs are too high.
Also if your turnover forces you to become VAT registered then you must be supplying more of your service, therefore you should be able to cope with reduced profit margin.

I had this same issue last year and this is what happened. Christmas 2011 I hit the threshold so started charging VAT and squirling away the money for payment to HMRC.

By the time in the new year I contacted them and filled in all the forms they gave me a VAT start date of March 1st. I assumed I would have to pay the 20% on sales from Christmas when I went over the threshold but they said I only need to start paying them from the 1st March.

So all in all it worked out very well and HMRC were fair. Going forward I will have to pay 20% VAT on all turnover even if in a year it is under £79K but you can always apply for a refund.

Actually we buy most materials in the UK and then sell products main outside of Europe. So we can therefore reclaim most of the VAT we have paid and HMRC are very quick at sending out a cheque each quarter. After the first refund request they did come out and look over our books so they understood the situation but I guess this is fair as they are paying us £1K – £5K each quarter

customer is public.

and yes the business could cope with a reduced profit margin, the question is how it hits the figures. As I feared there is no sliding scale, it’s a big chunk straight off the bottom line.

thanks everyone for the help!

Anyway, if I’m earning 76K, I’ll just put my feet up

Its not about earning, its about turning over. I can turn over close to twice the vat threshold, but my earnings are small percentage of that.

currently the business has a rate for it’s services which is acceptable. customers would not be best happy with a 20% prcie increase to cover VAT and could lose them.

who are your customers? Other businesses or the general public? And what do your services and the supplies you need consist of?

If its to other businesses then they’re probably VAT registered anyway so the difference doesn’t matter.
If you’re only selling your time and skills – consultation, design, a massage with a happy ending perhaps – then VAT registration adds a lot to your end price as its only your genius and your soft, warm hands that you’re selling. If your business is about adding value to other services or materials – a cabinet maker buys wood, turns to into something more valuable then sells it – then vat registration will save you money on your outgoings. If you’re selling to the public your price won’t go up by 20%, it need only go up by 20% of the difference between your costs and your selling price.

One service I have is I broker the transport of an exhibition in a shipping container around europe. I charge the client for managing this on top of the transport costs charged to me. It cost me £5k+vat to get the container to the south of france. I charge £100 on top for arranging that. If was non registered it would cost my client

£5k transport +£1k vat+£100 management= £6100
But because I’m registered I can recover that vat so the reality is it costs me £5k not £6k. So being registered the price isn’t
5K+ £1k+£100 plus 20% = £7320.
Its
£5k+£100+20%= £6120

So registration puts my price up by £20, not 20%

nput VAT is very small as the business is service based with little costs of VAT chargeable materials.

Are you happy living on what you’re earning just now? If you think vat would be detrimental just do less work, or at least don’t do more than would take you over the threshold. If you go over then maybe that means having to do a lot more work for any extra turnover to be worth while. If thats not the life you want, don’t do it.

currently the business has a rate for it’s services which is acceptable. customers would not be best happy with a 20% prcie increase to cover VAT and could lose them.

so the business would need to abosorb the costs of VAT. So the only place I see that coming from is profit. Input VAT is very small as the business is service based with little costs of VAT chargeable materials.

Might be worth talking to your accountant to make sure you recover as much as possible – don;t forget about fuel for example, if travel is part of your business. Also, without knowing the detail of your business, it might be worth double checking that all the services you offer are actually taxable.

You have my sympathies. If, as you describe, you will have minimal recovery, and will have to absorb the output tax within your existing sales pricing then it’s worse than you thought – it’s going to cost you 20% of your revenue, which will be much, much more than 20% of your profits.

£5k+vat+£100= £6100
But because I’m registered I can recover that vat so the reality is it costs me £5k not £6k. So being registered the price isn’t
5K+ £1k+£100 plus 20% = £7320.
Its
£5k+£100+20%= £6120

So registration puts my price up by £20, not 20%

All you have demonstrated there is that the VAT increase the the price of the value you add by 20%. You only add £100 of value so the VAT only adds £20 to the price.

But if you supply a service where the only input is your own brain power then the effect would be greater.

Christmas 2011 I hit the threshold so started charging VAT and squirling away the money for payment to HMRC.

By the time in the new year I contacted them and filled in all the forms they gave me a VAT start date of March 1st. I assumed I would have to pay the 20% on sales from Christmas when I went over the threshold but they said I only need to start paying them from the 1st March.

Were you issuing invoices which had an amount described as “VAT” on them before you registered for VAT, or did you just up your prices by 20%? If the latter – no worries, but if the former, HMRC take dim view of people charging VAT and pocketing the money (or at least they used to).

Enter the VAT flat rate scheme. I charge customers 20% VAT as I have to by law and pay HMRC 10% as that s the rate HMRC say is applicable to my business.

Ok, I can’t claim VAT on purchases but I don’t buy that much anyway and it makes accounts more straight forwards.

I’m well happy.

All you have demonstrated there is that the VAT increase the the price of the value you add by 20%. You only add £100 of value so the VAT only adds £20 to the price.

But if you supply a service where the only input is your own brain power then the effect would be greater.

I was using that as an extreme example, although it might only be brain power you’re selling but presumably at the end of the year you still have some receipts to tot up – car, fuel, hand warmers, etc. See if the vat you’re paying on that at the moment is significant or not

really difficult when you become registered after several years of not being.. explaining to customers that everything now costs 20% more to cover the VAT results in all customers commenting and either offering cash or seeking a cheaper alternative.

none of us would pay 20% extra for no additional value..

for me it was like starting over had to build up a whole new client base/ focus all for no benifit to my self.

really difficult when you become registered after several years of not being.. explaining to customers that everything now costs 20% more to cover the VAT results in all customers commenting and either offering cash or seeking a cheaper alternative.

I know it sounds patronising, but you should have been aware of VAT from the start of trading and priced accordingly for when you had to register…

No, customers wont tolerate a 20% increase if they cannot claim the VAT themselves.

I have been there myself years ago and did not cost for it – i ended up increasing turnover in the first VAT registered year by the amount i lost in payment to HMRC – not a nice feeling working more to earn the same….