Small business VAT registration, will it hurt our business?

[NewhamCompany]

Hello everyone,

We have a small appliance repair company operating in London. In the last 12 months we employed 4 people and our turnover for the last 12 months is £71 000 or just over.

Our accountant told us that we would need to register for VAT and start charging it, although I dread the moment when we start putting VAT on our invoices.

We've had relatively good business for the past 2 years, not being VAT registered.

In our trade, quite a lot of companies charge standard repair charge of £45 for a washing machine repair.
So, our repair charge was £45 until now also.
With the 20% VAT, our price will be £54,
if its a dishwasher repair it will be a staggering £71.

We only have 1 engineer working at the moment and I am sure the turnover in the coming months will go down (if counting the last 12 months).

I just think we will lose out so much on business to competitors that our business will go downhill. We do work with a number of agencies and landlords, but I don't know whether they'll be ok with our higher prices and whether they'd be able to claim the VAT back from our invoices.

Is there anything we can do to not lose out to our competitors who will be charging less? Can we stop charging VAT after a while, once our annual turnover goes down?

Thanks a lot in advance.

 

you could go on the flat rate and pay about 10% ,the downside will be that you can not claim the vat back on things under 2k .

 

[KateCB]

Sadly, all businesses face this, and some choose to either swallow the VAT, i.e your charge of £45 is including VAT which means you get 20% less, or to 'split' it and charge an additional 10% whilst swallowing the other 10%.

I believe that the threshold is £74,000 now, however if you believe that you are going to suffer a downturn, it may be worth holding off on the registration to see if you are right - the downside is that if you get to the threshold and have NOT registered, you are in trouble, fines ensue.....

Once you are registered, you cannot stop and start charging; you have to
DE register and provide proof of WHY you need to de-register, and then if say 6 months later it becomes apparent that you need to RE register, off you go again - it could also be seen as tax avoidence if you are seen to register, de-register, register, de-register etc!

Bite the bullet as a growing business, don't sell on price, sell on quality, and if you can MATCH your competitors prices rather than undercut, but provide a much better, quicker, reliable service, then it should work out.

 

[mit74]

Surely the other businesses are having to add VAT on to their price? So really you're charging considerably more than they in the first place?

 

[NewhamCompany]

Thanks a lot for your replies.

I didn't know about the 10% flat rate and will definitely ask my accountant about that.
We do provide a good, fair and sometimes same day service, but quite a lot of our business - about 50% or more is new business from new customers which mostly choose on price.

I guess we'll try and put up a price a bit and see how we get on, or try and decrease our overheads and trade with the prices we are on at the moment.

 

[NewhamCompany]

mit74,

It seems like quite a lot of companies in the market charge £45 (standard price) including VAT.
They just don't go over £70k or so a year and have engineers working for them as self employed, as partners. May be I am wrong.

 

[Spongebob]

Any business dealing principally with the public or with non-VAT registered businesses and who is charging mainly for labour should avoid VAT registration where possible.

You will make more money by staying under the VAT threshold than you would by increasing your turnover by 50% and employing more staff.

Registering for VAT will mean you have to put your prices up by 20%. If the market will stand such a price rise do it anyway and take an extra day off every week!

 

[paulears]

If you have employees or pay self-employed people to do the work, how on earth can you stay under the threshold? Surely your turnover must be more than this with people to pay. If you work on the assumption that as an absolute minimum you take in enough to pay the staff - then that's only £35 grand of invoices - once you start looking at your purchases too, how does this work?

 

[NewhamCompany]

Spongebob,

That's what I thought.
Only large white goods service companies can afford to charge their own price, not the market price, because they have big clients on their books and they service manufacturers appliances.

We'll see how our price hike will work out and may be change the future strategy.

Thanks

 

[NewhamCompany]

paulears,

I am the manager and work closely with the managing director, and this issue is really big at the moment.
The managing director says that we need to register for VAT now, so I don't know exactly how much the company was making before.

 

[paulears]

It's not quite as bad as it sounds because if you use spares, you can claim the VAT back on what you buy in, and VAT on fuel is something that you've not had the ability to reclaim. So in essence your main problem is just the labour charge isn't it - so although you will have to absorb it, you could perhaps increase your margin on any components sold on. Are there any other extras you could get the engineers to flog? TV engineers now all carry cables - often clever, vastly overpriced ones that they sell to the customers. I notice your super new 56" TV is using the old cable you had on from the old TV you had, our new super-dooper digital cable will be a great replacement (an twenty quid profit on top of the repair!).

 

[crphillips]

If your turning over 70k with 4 staff then profits must be pretty much non-existent?

What is the work load like on the 4 staff? Can you get rid of two and stay under the threshold or could you keep the 4 and give them twice as much work and go VAT registered, reduce you profits by 10% and add 10% for the VAT?

 

[MASSEY]

VAT will hurt you. Depends how much competitors rely on "we don't charge vat" in their sales pitch i supose?

 

[NewhamCompany]

If your turning over 70k with 4 staff then profits must be pretty much non-existent?

What is the work load like on the 4 staff? Can you get rid of two and stay under the threshold or could you keep the 4 and give them twice as much work and go VAT registered, reduce you profits by 10% and add 10% for the VAT?

What I was trying to say was that we had 3 engineers at one point last year for 6 months or so, and we employ an office manager. Therefore, during the time when 3 engineers were brining the revenue in, it went up quite a bit.

Now we only have one engineer and may not go over the £74k threshold in the future. We are thinking of expanding and getting new engineers working.
10% for VAT and 10% in profit reduction sounds good.

 

[NewhamCompany]

VAT will hurt you. Depends how much competitors rely on "we don't charge vat" in their sales pitch i supose?

It's hard to say exactly who charges VAT and who does not, or who includes it in their quoted price. I would say at our level 50% of companies are VAT registered and 50% are not, quite a few of them sprung up recently, so start ups I guess...

 

[JohnLocke1]

VAT threshold is £73k no £74k. Wouldn't want you to get stung for that £1k.

Depending on margins etc, you MUST work out how much more work you will have to take on just to cover the £12,000 odd vat you have to pay on the £73k. So already you need to turnover £87k just to be where you are now.

You will be claiming some VAT back though, I would imagine that as your main charges are for the labour rather than parts this would be minimal - petrol, parts, stationery etc.

 

[BobBuilder]

We are thinking of expanding and getting new engineers working. 10% for VAT and 10% in profit reduction sounds good.

If you lose 10% of your turnover to VAT it's the turnover that reduces 10% - the profit reduction will be larger than 10%

 

[Spongebob]

I'm having a bit of trouble understanding how this business can support a managing director and a manager with only one engineer doing all the work and on a turnover of less than £70k pa!

Can you fix appliances yourself? If so, I would take the engineer with me and set up my own firm in competition working on a far leaner business model...


...and stay under the VAT threshold!

I dare say a large proportion of your clients pay you in cash....

 

[sansam]

you could go on the flat rate and pay about 10% ,the downside will be that you can not claim the vat back on things under 2k .

thanks for the info...

 

[teddys]

The VAT registration threshold now is £73,000. You say your turnover was £71k is expected to go down. So why register for VAT now?? If you do go for registration do choose flat rate accounting: it will help if your input costs constitute mostly non VAT items like wages.