Will VAT registering ruin my business?

[stuart seller]

Currently I run a service for clients where we charge by the hour, most clients having 2 - 8 hour per week of our service. We charge £12 per hour for this and pay our employees around £6-7 per hour. After a difficult start we are on track this year to make over 70k turnover and therefore I need to get VAT registered. However, with the employees pay (they take home about £6 - £7 per hour after deductions), I am unsure whether we would be left with enough profit to make the business viable. I know we can start charging £12 + VAT but the thing is that we service private clients homes and do not operate much b2b service: therefore this might be a difficult rise for them to swallow. A lot of competing companies charge less than us because they use self employed workers, but our USP is the fact we have permanent employees and therefore this offers them better security - this has won us a lot of business so far. We run other one day services, where we charge a lump sum ranging from £125 - £500 and events where we charge up to £4000, but the private service for clients is the core of our business which we would like to grow. Would it be possible to set up a new company for each strand of the business to stave off the VAT registering for as long as possible?

[elainec100@cheapaccounting]

You may fall foul of these rules if you set up separate businesses:

Do not avoid registering for VAT by artificially separating business activities

http://www.hmrc.gov.uk/vat/start/register/when-to-register.htm#7

If the business can't sustain the vat then the business model is not going to work I'm afraid.

[Moocher]

What you are suggesting is artificial separation and not allowed for VAT purposes.
I am a little confused. You say you pay your employees £6-£7 per hour and then you say in a different sentance that they take home £6-£7 per hour after deductions.
Which is it?
If their net pay is £7 per hour then by my calculations (grossing up for tax & NI plus employers NI) you can only be making a gross profit of about £1 per hour per employee - I may be wrong. Take into consideration the employers liability insurance etc. then I would question the viability of the business as a whole.

Just my thoughts - sorry divulged away from your question a bit.

[stuart seller]

I was saying that about the pay merely because some are paid more than others. For the sake of argument, say they take home £5.80 after deductions, if you want an average.

We pay about £90 per month liability insurance.

Any more comments much appreciated.

[E Storey]

My first client was a cleaning company that informed me her accountant had told her to split her company into 2. Charging VAT to corporate clients and not charging it to domestic ones.

Since they worked through the same phone/e-mail and bank account, and were all part of the same business prior to VAT registration, I advised her to get a second opinion.

She shouted at me and explained why she was perfectly justified in doing this. I cordially stated that I was not a tax adviser, but I still recommend she get a second opinion, as it's not really me she has to persuade, it's the VAT man!

She decided she no longer required my services. And she never paid her bill..... :D

[KidsBeeHappy]

, as it's not really me she has to persuade, it's the VAT man!

She decided she no longer required my services. And she never paid her bill..... :D

Aye, but she'll be screaming down the phone at you the day after the VAT visit :D

[davek17]

Don't mess with HMRC, or you definitely will have an unviable business.

VAT is no great problem, its easy to work it out with a half decent accounts package, see the Solar accounts threads on this forum for discounts. You'll have to do it anyway if you're going to be a £70K business.

I knew someone who did something similiar by splitting their company up into VAT and non VAT sides and it brought him a world of pain. The sheer amount of time and accountancy expertise this brought upon him when he was investigated was enough to put him out of business and I think this could be classed at tax evading if you're not careful.

Just get VAT registered like everyone else and keep it all above board!

[Mike George]

I'm not an expert on VAT or tax regulations, just voicing some ideas - doesn't there seem to be some mileage in the idea of running the one-off services and events as a separate business? You could perhaps look at subcontracting the work for these?

I agree the root of your problem seems to be the charge-out rate is too low, but I admire you for not using the 'self employed' option to cut costs. If you raise your rates to £14.40 you risk losing some customers, even if your service is very good.

Have you taken into account the VAT part of your costs that you will gain when you register? Obviously not a large proportion of your outgoings but will make a small difference. And just because you're charging VAT you don't have to pass it all on to the customer - how would it work out if you raised the price to say £13 or so? If you do it in January when the VAT goes up you can blame the Government!

[Spongebob]

If you intend to go on developing and growing the business then you have no alternative but to register for VAT now.

If however, you are happy with a turnover of around £70k and have no ambition to increase this then it could be in your interests to suppress any expansion, keep under the turnover threshold, and remain unregistered.

If your market will stand an uplift in prices of 20% (the new VAT rate) then it would be a lot more profitable for you to increase your charges anyway and lose your poorest performing employee in order to remain under the £70k threshold.

[stuart seller]

Thanks for the replies.

I think really I need to drill into the figures to work out just how viable this all is. I've worked out that from August last year to about June we turned over about 85k, but of this profit was 25k, so its not looking perhaps as rosy as the turnover indicated.

I like the suggestion of £13 an hour and absorbing the rest of the rise in the business, but I'm not sure if this is viable looking at the profit margin.

Looking at our expenses, e.g. products and rates, we spent 11k over that period. So reclaiming VAT would get us back only about 2k.

Really not sure what to do, perhaps should have planned for this earlier...

[elainec100@cheapaccounting]

Have you looked at a flat rate scheme? May be more suitable to your needs given the low level of input tax to claim back.

[David Griffiths]

That last post (from the OP) suggests that you are already over the VAT registration limit - £85k from August 09 to June 10 and should have registered in July or possibly before.

You need to sort this out very quickly as there are penalties for late registration, and of course you are not increasing your prices to include VAT. You will still have to pay the VAT however.

Penalties are 5% of the VAT from the correct date of registration up to the date that you do notify registration

[Mike George]

perhaps should have planned for this earlier...
These forums would be pretty boring if we all did that! :)

[Homshaw]

The VAT threshold is a real problem. Businesses operating at just below the threshold and unable to pass on VAT to clients face a real dilema. By increasing sales by a tiny amount all your profits can go to the Vatman. It could need your turnover to increase from 70 to 100K before your bottom line is the same and by then you are working 50% harder.

It can be a real disincentive to expand which has to be bad for the economy.

In some countries I understand the threshold is zero and I think there is a lot to commend it.

[internetspaceships]

The VAT threshold is a real problem. Businesses operating at just below the threshold and unable to pass on VAT to clients face a real dilema. By increasing sales by a tiny amount all your profits can go to the Vatman. It could need your turnover to increase from 70 to 100K before your bottom line is the same and by then you are working 50% harder.

It can be a real disincentive to expand which has to be bad for the economy.

In some countries I understand the threshold is zero and I think there is a lot to commend it.

Actually that would be a good idea- - then people would most likely have a lot less confusion because more would understand VAT by definition.

I VAT registered 14 years ago when I started up. I was selling to companies from outset and they didn't take non VAT companies as seriously.

To the OP, if you need to do it, crack on and go through the pain barrier. Once it's settled you won't look back.

Jon

[David Griffiths]

It could need your turnover to increase from 70 to 100K before your bottom line is the same and by then you are working 50% harder.

More than a touch of exaggeration there, I think. At current rates, £82,250 gross gives £70,000 net of VAT. Can't quite see where the need for other £17,750 comes from?

And that ignores any saving on input tax


In some countries I understand the threshold is zero and I think there is a lot to commend it.

That I do agree with. I believe that hardship on VAT registration is best removed by reducing the threshold, not increasing it

[David Richards]

In some countries I understand the threshold is zero and I think there is a lot to commend it.A lot of countries have a zero threshold for 'non-resident' or 'non-established' businesses (where you trade in that country but don't set up a subsidiary company there), but I don't know if any have a zero threshold for 'resident' businesses. For example; In Ireland the VAT registration threshold is €37,500 for businesses supplying services (and some other categories) and €75,000 for businesses supplying goods - but the threshold is zero for 'non-resident' businesses.

The UK has one of the highest (if not the highest) VAT registration threshold in the EC. Politicians and trade bodies alike seem to consider that higher VAT registration thresholds are good for small businesses - but what you've highlighted is that that higher the threshold, the bigger that 'pain zone' after registering.

[Brad Naylor]

The VAT threshold is a real problem. Businesses operating at just below the threshold and unable to pass on VAT to clients face a real dilema. By increasing sales by a tiny amount all your profits can go to the Vatman. It could need your turnover to increase from 70 to 100K before your bottom line is the same and by then you are working 50% harder.

It can be a real disincentive to expand which has to be bad for the economy.

In some countries I understand the threshold is zero and I think there is a lot to commend it.

I'm a self-employed carpenter doing work exclusively for non VAT registered clients. I know that when I last did the maths VAT registration would cost me around £140 per week - in other words I'd have to work an extra day per week to stand still! The increase in the VAT rate will only serve to make non registration even more attractive.

My problem now is that I would really like to take on an employee to help me out. The extra revenue required to pay his wages would push me through the VAT threshold, reducing my profitability and neccessitating even more turnover just to stand still.

It is not difficult to envisage the scenario whereby I would have to take on two employees just so that I could earn the same net income that I can currently earn on my own. But then of course I would need a bigger workshop and another van... :eek:

Is it any wonder that most tradesmen quietly keep under the VAT threshold and make a decent living for themselves rather than expand and employ staff?

[Homshaw]

A lot of countries have a zero threshold for 'non-resident' or 'non-established' businesses (where you trade in that country but don't set up a subsidiary company there), but I don't know if any have a zero threshold for 'resident' businesses.

Not an expert but I thought Spain had a zero threshold

[Homshaw]

More than a touch of exaggeration there, I think. At current rates, £82,250 gross gives £70,000 net of VAT. Can't quite see where the need for other £17,750 comes from?

And that ignores any saving on input tax

But it's people like hairdressers, beauticians, tradesman who provide mainly labour who have the biggest disincentive. They have little by way of taxable inputs.

By going over the limit you incur a VAT cost plus extra labour costs which carry no imputs.

[Stretchy]

As others have said, at the end of the day for a business to be scalable the model must be able to cope with VAT registration. If it doesn't its not a scalable business model.