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Limited by VAT Threshold

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Brum26

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May 20, 2014
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Afternoon all,

I am here looking to vent a little bit and to see if anyone else has been in a similar situation to myself. I currently run a business which relies heavily on the freelancers that I use, therefore isn't hugely profitable. The business takes in a decent amount of money but also pays out a lot. My products are sold directly to the public and adding an extra 20% to the prices if I was to become VAT registered would almost certainly put a lot of people off.

So, I am in a situation where I am sitting just below the VAT threshold and I am checking on a constant basis that I am not going to go over it. If I was to go over the VAT threshold and become registered I would have to increase my turnover quite significantly to remain profitable and due to various factors this would be very difficult to achieve.

Has anyone else been in this position? Any advice?
 
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Brum26 said:
The business takes in a decent amount of money but also pays out a lot.
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If that's the case, and what you are paying out has VAT added, then you will be able to reclaim that VAT. This has the potential to significantly reduce the overall difference between registered and non-registered.

Have you actually done the maths to work out what it would cost?
 
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Another option is to move the business to another entity. eg if you are a sole trader form a limited company. This only works if you have not yet reached the VAT threshold as the company will inherit the VAT status of the business of the business it is taking over.
 
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You could also look at the flat vat rate scheme. You would need to work out if it would be beneficial depending on your business type and purchases you make.
 
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SteLacca said:
If that's the case, and what you are paying out has VAT added, then you will be able to reclaim that VAT. This has the potential to significantly reduce the overall difference between registered and non-registered.

Have you actually done the maths to work out what it would cost?
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Yes, the problem I have got is that almost all of the people I pay are not VAT registered themselves. I had a lot of issues last year when my "accountant" advised me to group my businesses together in to one Ltd company and become VAT registered. 3 months of that almost killed the business and I later found out that I had been given some very duff advice. Needless to say, she is no longer acting as my accountant.
 
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The business is actually already a Ltd company. I have a couple of much smaller businesses that I run as a sole trader.
 
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DontAsk said:
The problem is that you did not plan for growth above the threshold when you set up the business.
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Wow, slightly harsh. When I setup the business I had no idea that it was going to grow to this level, especially within 2 years. I am sorry that I am not a more seasoned entrepreneur.
 
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DontAsk said:
The problem is that you did not plan for growth above the threshold when you set up the business.
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Oh, I'm sorry. I didn't realise. I've just checked your recent postings and can see that you are the forum troll. As you were.
 
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Brum26 said:
Wow, slightly harsh. When I setup the business I had no idea that it was going to grow to this level, especially within 2 years. I am sorry that I am not a more seasoned entrepreneur.
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Its easier to factor the future VAT collection into your pricing before you get to the threshold.

Now, your competitors - they are below the threshold?
Your clients - the people that pay you money - they are below the threshold? If they are VAT registered then overall makes no difference with you charging 20% extra.

The one thing you don't want to do is go just above the threshold and sit there.
Either blow past it and head upwards or else stay below the threshold for now.
You have maybe a year. It is quite possible for the chancellor to reduce the VAT threshold at some point soon. In which case you and your competitors may all find yourselves registering.
 
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Mr D said:
Its easier to factor the future VAT collection into your pricing before you get to the threshold.

Now, your competitors - they are below the threshold?
Your clients - the people that pay you money - they are below the threshold? If they are VAT registered then overall makes no difference with you charging 20% extra.

The one thing you don't want to do is go just above the threshold and sit there.
Either blow past it and head upwards or else stay below the threshold for now.
You have maybe a year. It is quite possible for the chancellor to reduce the VAT threshold at some point soon. In which case you and your competitors may all find yourselves registering.
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It's a really tricky one. I don't really have any direct competitors. My customers are the general public so they are not VAT registered. There is one very big client that I have not yet been able to get. If I manage to get it then it won't be so much of an issue as the turnover would increase by a lot but without it it would be very difficult to blow past the threshold. For now I think I have no choice but to sit below it and see what happens.
 
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Without direct competitors then should not be a problem adding on VAT. The public pay the VAT....

Have a look at the options on offer and talk to an accountant. Adding 20% to your price is not the only way to be VAT registered though after a certain higher turnover you would have to.
The flat rate scheme may suit you better until you reach that high.

https://www.gov.uk/topic/business-tax/vat
 
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To be fair DontAsk has a valid point

Lots of members on here like to shout about how business plans are rubbish, or a waste of time but this is precisely the type of issue that even a rudimentary plan can help you to anticipate and address in advance

So, like many, many businesses you just got on with it. Now is a great opportunity to start planning to anticipate future issues with growth.
 
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I think it's a ridiculous idea £26000??? What drugs are the government taking now ? The problem with this is that if this vat threshold was implicated it would close my small business instantly as I would need to charge vat on top which many customers will not pay , this government make it harder all the time for small businesses like mine to actually do well , I really hope someone from the working class will one day be elected and that understands how hard it is down here , this will close many small businesses across rip off Britain !
 
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Brum26 said:
Afternoon all,

I am here looking to vent a little bit and to see if anyone else has been in a similar situation to myself. I currently run a business which relies heavily on the freelancers that I use, therefore isn't hugely profitable. The business takes in a decent amount of money but also pays out a lot. My products are sold directly to the public and adding an extra 20% to the prices if I was to become VAT registered would almost certainly put a lot of people off.

So, I am in a situation where I am sitting just below the VAT threshold and I am checking on a constant basis that I am not going to go over it. If I was to go over the VAT threshold and become registered I would have to increase my turnover quite significantly to remain profitable and due to various factors this would be very difficult to achieve.

Has anyone else been in this position? Any advice?
Click to expand...

ME , I'm in exactly same position and I completely agree with everything you wrote, I couldn't believe my ears when someone told me today , this is an absolute joke , this will put most of my customers off , it's ok for people posting on here saying it won't affect them as there turnover is tiny but for businesses like ours it's a nightmare , I'm outraged by this.
 
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Mr Shafted by uk gov said:
I think it's a ridiculous idea £26000??? What drugs are the government taking now ? The problem with this is that if this vat threshold was implicated it would close my small business instantly as I would need to charge vat on top which many customers will not pay , this government make it harder all the time for small businesses like mine to actually do well , I really hope someone from the working class will one day be elected and that understands how hard it is down here , this will close many small businesses across rip off Britain !
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It would solve the problem of businesses that are able to appear cheaper by keeping below the threshold. If pretty much all businesses are over the threshold then the public has no choice about paying VAT except by using pretty much the tiniest or newest businesses.

Do all your competitors currently operate below the threshold or is there any above the threshold?
 
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Mr Shafted by uk gov said:
I think it's a ridiculous idea £26000??? What drugs are the government taking now ? The problem with this is that if this vat threshold was implicated it would close my small business instantly as I would need to charge vat on top which many customers will not pay
Click to expand...

Customers pay VAT every day.

Our VAT threshold is currently very high. And as you've seen in this thread, it acts as a bit of a ceiling. It's what stops businesses from growing.

And is an unfair 'advantage' to small operators.

We should be encouraging all businesses to grow - not stick a great big barrier in when you reach a certain point.

If every business was VAT registered, then it would make much more sense.
 
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I say bring on the proposed lowering of the VAT threshold. It will create a much more level playing field. Any serious business will (should!) plan for VAT from the outset with such a low threshold.

If there is a real market for your products then customers will still buy. If there's no real market then all sort of other factors could cause your business to fail. You need to be worrying about them, not VAT.
 
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We are also in the same boat and can't make our minds up to VAT register. I'm told we can claim the VAT back on some of our stock purchased in the last few months, is this correct?
 
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DontAsk said:
Any serious business will (should!) plan for VAT from the outset with such a low threshold.
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Absolutely, if you deal B2C in your early days you should be charging the price accounting for 20% VAT (just means you keep the '20%'), that way your prices don't change in the eyes of the consumer once you register for VAT.

Prettycool said:
We are also in the same boat and can't make our minds up to VAT register. I'm told we can claim the VAT back on some of our stock purchased in the last few months, is this correct?
Click to expand...

Speak to your accountant, they will manage this for you.
 
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I suspect that quite a few businesses under the VAT threshold take the view that they have to increase selling prices by 20% if the register for VAT, if they wish to maintain the same level of profit. (And by extension that their sales will fall so its not a good thing.)

That is not true. It depends very much on the financial structure of the business, if a lot of non people costs are involved then registering for VAT can be attractive. When a company is not VAT registered the cost of all purchases has to include VAT, compared to a VAT registered business whose cost of purchases will not include VAT and is therefore about 20% lower.
 
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GraemeL said:
It depends very much on the financial structure of the business, if a lot of non people costs are involved then registering for VAT can be attractive.
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Its the ratio between input VAT and output VAT that is key.

My B2C sales have a good markup and are at 4-5 x cost price so the saving from input VAT is only 20 - 25% of the VAT charged to customers.
 
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Back to the basics

Can you take your product up market from where it is, by that I mean make a better or more appealing product.

Perceived value can and does make a massive difference to what customers are willing to pay, a higher spec car is seen as worth while, yet the owner may have paid £1500 for a £300 Sat Nav, or £xxx for a better paint job that only costs a few bob more for the maker to paint, a fitted electric adjustable seat when he is the only driver, its just perceived better yet a rip off in real monetary terms
 
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Perhaps a slight tangent: I use a mobile mechanic and his customers but the parts and consumables are bought by his customers. So, he is billing for his time and not for parts on which he he would only make peanuts.
 
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wevet said:
Perhaps a slight tangent: I use a mobile mechanic and his customers but the parts and consumables are bought by his customers. So, he is billing for his time and not for parts on which he he would only make peanuts.
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Lots of peanuts add up.
 
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Every business I've had has been B2C, I've always seen being vat registered as something to aim for, it gives a real impression of being professional and successful.
My current business for the last 9 years, has almost no overheads beyond marketing, so I claim very little vat back. I simply collect 20% and give it the vatman, like the good little pseudo tax collector I am!

Up your game, improve your image, improve your marketing, add a perception of value and be proud of your status as a pseudo tax collector. Unless of course you like tyre kickers looking for the cheapest price, in which case: As you were!
 
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