Such a VAT mess! Any advice welcome

[trax7960]

Hi All,

So here goes.

I've been running a business for 3 years now which was originally a merger of myself and my wife's businesses. I thought one business would mean half the admin - how wrong I was.

We scaled too quickly and ended up making big losses in our first year of trading, these were compounded in year 2 and we're currently about £40k in the red. No lending, funding or overdraft, so the VAT savings kept us going in the hope of turning things around - huge mistake.

This time last year we still owed about £10k for our 2018 VAT bill and were dreading our 2019 bill of about £20k. We made big changes, scaled back, cut loads of costs, reduced wages, sold assets and eventually paid off our 2018 bill and set up a direct debit to pay 2019 - we ended up increasing our direct debit amount with HMRC and paying off 2019 3 months earlier than planned.

We're on the annual scheme so as of today we have no VAT due - but of course, that's going to change in April when we'll be hit with a £30k bill. We've been making interim payments throughout the year which add up to £10k, so in April we'll be on the hook for £20k. Compared to last year, we're in a much better, but still currently untenable situation.

I believe the business to be viable, we've cut costs and improved margins dramatically, I think our main problem is the original hole we've dug, and it's going to take a couple more years of this "new" way of working to dig us out.

We're just desperate for runway - we're a seasonal business so we're not expecting much in the way of cash flow now until May. We have bills to pay, interim VAT payments overdue and of course that looming bill in April.

Our order book picks up in May, then June -> Sept are full of high margin sales which will pull us through. If we hadn't already got ourselves so far in the red we'd be laughing right now since we've cut costs. Even if we had some borrowing or an overdraft it'd tide us over, but we don't, and with two years of increasing losses we'll struggle to find any finance now.

I just don't know what to do. Half of me says "you've screwed it up, cut your losses" but then, of course, there's the full order book kicking off in a few months time. I'm just stuck. I wish I'd never merged; individually the two businesses ticked over nicely. As soon as we merged, turnover skyrocketed, VAT skyrocketed, and none of our suppliers are even VAT registered so we can't claim anything back.

Any advice that's better than my own ideas of either banging my head against a wall or heading to the Winchester until this all blows over would be really appreciated - particularly if you happen to have been in this situation before.

Cheers,

T xx

 

[zomex]

Hello,

You're in a tough situation but I congratulate you for working things out logically. It sounds like you're on the right path.

You mentioned your business is very seasonal, how much time does your business require when you're out of season? Does this free up anytime/is there anything you can do in the out of season period to generate income for the business?

 

[Mr D]

Sole trader? Partnership? Ltd company?

 

[trax7960]

Sole trader? Partnership? Ltd company?

Apologies. Limited company.

Hello,

You're in a tough situation but I congratulate you for working things out logically. It sounds like you're on the right path.

You mentioned your business is very seasonal, how much time does your business require when you're out of season? Does this free up anytime/is there anything you can do in the out of season period to generate income for the business?

Thank-you, that means a lot! We usually spend a lot of time on admin, marketing, sales etc out of season which is why things are looking strong later in the year. We put events together for corporate clients - launches, awards nights etc, so there's a lot of maintenance of kit, rehearsals, recruitment expenses out of season.

This year we've started to offer other related services to existing clients to try and 'plug the gap' which we've had some initial success with, but of course, it'll take time to build. We're aware that we can't continue with such a quiet first half of the year because of course the overheads stay the same!

We're hoping that some of these new services will begin to generate some basic revenue for us soon and that's what will keep the lights on until May hopefully.

 

[MikmakFer]

Notwithstanding these historic issues, On a day to day basis, is your business profitable and cash positive?

HMRC are usually quite understanding if you explain the situation to them provided you can give them comfort that you've got a solution to stop it happening again - it's in their interests which is why you need to be open and honest about it.

If it's not profitable then that's when I would rethink about whether it's viable and how much it will cost you to get profitable and if it's profitable and cash negative then understand what the gap is and how to plug it.

Longer term though, when you mean seasonal - is the market seasonal or do you work on a seasonal basis? i.e. you deliberately focus on business development for that part of the year to get the revenue later in the year...

 

[trax7960]

Notwithstanding these historic issues, On a day to day basis, is your business profitable and cash positive?

HMRC are usually quite understanding if you explain the situation to them provided you can give them comfort that you've got a solution to stop it happening again - it's in their interests which is why you need to be open and honest about it.

If it's not profitable then that's when I would rethink about whether it's viable and how much it will cost you to get profitable and if it's profitable and cash negative then understand what the gap is and how to plug it.

Longer term though, when you mean seasonal - is the market seasonal or do you work on a seasonal basis? i.e. you deliberately focus on business development for that part of the year to get the revenue later in the year...

It's quite a seasonal market yes, but we've struggled more than usual this year - normally we do have a busy February and that's really what has caused these cash-flow issues to be more prominent.

We've dropped a lot of expenses, closed our offices, dropped low margin clients, so turnover is down but profit is up which is what we want to see. I've also moved to a minimum directors salary with a view to taking dividends which has improved the look of our balance sheet no end - previously I had a ridiculous setup involving a service company, management charges and lots of PAYE bills.

T xx

 

[Lisa Thomas]

Options seem to be:

1. Agree a Time to Pay Plan with HMRC (usually they will want payment within 12 months and might not be acceptable due to past issues)

2. If 1 is not an option you could try for a CVA but possibly won't be viable if HMRC are the only creditor

3. Liquidate, either voluntarily or through Court. You could potentially start again in a Phoenix Company if you think you have fixed the issues and can make a go of it second time around.

 

[KAC]

3. Liquidate, either voluntarily or through Court. You could potentially start again in a Phoenix Company if you think you have fixed the issues and can make a go of it second time around.

This seems a sensible option to discuss with an insolvency practitioner

 

[MikmakFer]

It sounds like it's purely a cash management issue then.

I'd suggest firstly understanding what the profitability looks like over the next 12 months and subsequent cashflow on a weekly basis - it's better to prepare this on a worst case scenario. If this a) highlights a gap that can't be funded by you or b) is just not viable then I'd start thinking about an insolvency practitioner.

Once you've done the above and are comfortable that there are no unfunded gaps in your cashflow, go to HMRC with it and say "look, we've ran into some issues but here is our solution" and see what they say. As I said, I couldn't see them knocking this back as if you go to an IP then unlikely they will get the full amount due whereas under the proposal, it's more likely they will get the full amount due.

Don't feel disheartened with this, it's all too common that businesses are profitable but cash management isn't as strong.

You just need to start thinking a year ahead


Mike

 

[nelioneil]

Sorry to be quite blunt but should you not be receiving vat refunds if you are making losses, as your expenses should be exceeding your income?

 

[Mr D]

Sorry to be quite blunt but should you not be receiving vat refunds if you are making losses, as your expenses should be exceeding your income?

Umm.. can make a loss and pay out considerable VAT payment.
Have done it multiple times.

 

[Nico Albrecht]

I believe the business to be viable,

Your business is not viable, no cash reserves, huge debts and a bit of hope that in May work is coming in or picking up. You possible cannot predict futures sales.

but we've struggled more than usual this year

What if you even struggle more this year with debt carrying forward from last year. Without hard orders booked in already your business is not solvent anymore.

 

[trax7960]

Sorry to be quite blunt but should you not be receiving vat refunds if you are making losses, as your expenses should be exceeding your income?

No. VAT is charged on turnover, not profit. We've got a turnover of ~200k, hence the VAT bills.

Your business is not viable, no cash reserves, huge debts and a bit of hope that in May work is coming in or picking up. You possible cannot predict futures sales.

It's not a bit of hope, we've got contracted and confirmed jobs from May right through until January; high margin work with guaranteed profit. We do have large debts, but the debts we have now are considerably smaller than they were this time last year. Things are getting better, not worse - but runway is runway, and lack of cashflow is a lack of cashflow no matter what.

T

 

[Nico Albrecht]

It's not a bit of hope, we've got contracted and confirmed jobs from May right through until January

It is hope until those orders are paid for or high upfront payments were made to cover your cost - profits. At this stage this is worth worth very little and I would be very worried about the state of your business. Maybe not worried but concerned + realistic.

Contracts can be canceled or disputed and you ending up in legal battles which you can't afford either and they other side might know that too. Add another unknown variable such as random event e.g coronavirus or whatever can happen in a specific industry material shortfall, random price increases , material shortages.

It would be absolut viable to review that business. If all would be viable any bank would give you an overdraft or loan to cover future costs and cover short term cash issues if they believe you can repay it.

 

[trax7960]

It is hope until those orders are paid for or high upfront payments were made to cover your cost - profits. At this stage this is worth worth very little and I would be very worried about the state of your business. Maybe not worried but concerned + realistic.

Contracts can be canceled or disputed and you ending up in legal battles which you can't afford either and they other side might know that too. Add another unknown variable such as random event e.g coronavirus or whatever can happen in a specific industry material shortfall, random price increases , material shortages.

It would be absolut viable to review that business. If all would be viable any bank would give you an overdraft or loan to cover future costs and cover short term cash issues if they believe you can repay it.

I guess it's just a quirk of the specific industry we work in, but this is just how it operates - we fill the diary, the jobs are contracted, the venues are booked and paid for, the tickets are sold - it has been like that for a decade now. Confirmed is confirmed - once or twice we may get the odd smaller job drop out (and subject to cancellation fees, which to date have never been disputed or unpaid) but for the best part we're working with multinationals and a confirmed booking is as good as cash.

Unfortunately, my personal financial situation leaves a lot to be desired - in an ideal world, banks would lend on a viable business or strong diary/order book, but trust me, a directors credit file with a default on it means a door slammed in your face. I've been there.

T.

 

[Stedurham]

I know of a company that do similar to yourselves but they do use the stock that they buy for events and sell online. So say balloons as an easy one and sell online, gives them now a good cash flow all year around, from 1/2 orders a week on amazon and e bay now they do 100 plus a day

 

[trax7960]

I know of a company that do similar to yourselves but they do use the stock that they buy for events and sell online. So say balloons as an easy one and sell online, gives them now a good cash flow all year around, from 1/2 orders a week on amazon and e bay now they do 100 plus a day

Wow, that's great, good for them

We've started to do similar actually to try and turn our fortunes around - we don't hold 'stock' as such, but for the average product launch event we might get 6 costumes or uniforms produced, up to an hour of custom audio recorded in a studio, then create graphics and videos to support the event etc all in-house. We're trying to move into supplying these same services to other events companies with a similar view to filling our low-season diary.

T

 

[Ola1]

Hi Trax, it may be useful to spend a little time doing a cash flow projection (Future facing)

Plus taking a look at the numbers before businesses merged and numbers after, see why exactly how 2 good cash flows become one that appears to be not so good.