VAT is Killing my Business!

[HD123]

Hi, I'm new here. I have been running my business for 5 years. In the last year I have had to become VAT registered. My turnover is not going to increase from this point as there aren't the hours in the day, and when you take the VAT amount off the turnover it is the same as the VAT threshold - yet I'm having to hire more staff to run the service and as its service based there is extremely little I can claim VAT back from. I cannot put my prices up as they are as high as they can be but I don't want to limit my business and turning down that £20,000 of business as it will restrict me so much and will reflect negatively on new and existing clients. I've looked at hiring out my company to my employees and I can't see it working. Is there a way of part hiring out the overspill part of the business? Is there anyone who could advise on other solutions or what type of person would you advise talking to about this? Accountant/business mentor etc? Thank you.

 

[Chris Ashdown]

What service industry are you in?

 

[HD123]

Hi Chris, its pet care and therapies. I employ a small team of staff to do this.

 

[STDFR33]

If you can't sell more, sell less and remain under the threshold.

 

[HD123]

STDFR33 - this is looking likely to be our only option. Its horrible when we are a successful business and people love what we do and it means turning away around 15 clients a week. I've looked at all the different options but can't find a solution other than this. I am concerned that we'd loose our credibility staying small but I can't spread myself any thinner to operate too far past the point of where we currently are.

 

[Root 66 Woodshop]

Legal beagles may be able to help with this, but... Could you not split the company into two?

Surely there's two different sides to the business, therefore could be split... but as I said, I'm not sure if that would be legal to do or not.

 

[STDFR33]

Legal beagles may be able to help with this, but... Could you not split the company into two?

Surely there's two different sides to the business, therefore could be split... but as I said, I'm not sure if that would be legal to do or not.

The two businesses could be aggregated for VAT purposes.

 

[STDFR33]

STDFR33 - this is looking likely to be our only option. Its horrible when we are a successful business and people love what we do and it means turning away around 15 clients a week. I've looked at all the different options but can't find a solution other than this. I am concerned that we'd loose our credibility staying small but I can't spread myself any thinner to operate too far past the point of where we currently are.

Have you looked into the Flat Rate Scheme? That could soften the blow.

If you don't want to scale down, you need to bite the bullet and look at ways to increase your turnover and profits.

 

[Blaby Loyal]

Legal beagles may be able to help with this, but... Could you not split the company into two?

Surely there's two different sides to the business, therefore could be split... but as I said, I'm not sure if that would be legal to do or not.

Nice thinking but it may fall foul of the "disaggregation" malarkey. Pet care and therapy are far too similar for my tiny way of thinking.

 

[Root 66 Woodshop]

@Blaby Loyal very true... if that's the case though, how do franchises work against this? could that be a possibility? From what I know about a particular franchise in our line of work, each franchise is recognised as a separate company trading as... [naflockies.com] Could that be a way forward?

 

[DavidWH]

When you take the VAT amount off the turnover it is the same as the VAT threshold

VAT shouldn't really be included in your turnover.

It sounds to me like you were perhaps charging £10.00 for something, and now you're VAT registered you're still charging your customer £10.00 and paying the VAT from it, meaning you only see £8.33.

In theory, VAT should be added on top of the original £10.00 you charged, meaning you charge the customer £12.00, £10 for you, £2.00 to HMRC.

Of course, if you're dealing with B2C, who aren't VAT registered, it's a price hike, that may turn some away.

 

[Blaby Loyal]

@Blaby Loyal very true... if that's the case though, how do franchises work against this? could that be a possibility? From what I know about a particular franchise in our line of work, each franchise is recognised as a separate company trading as... [naflockies.com] Could that be a way forward?

I suppose that's one of the beauties of franchising. Hopefully someone with more knowledge of VAT than wot I've got will come along and give us some more focussed guidance.

 

[STDFR33]

@Blaby Loyal very true... if that's the case though, how do franchises work against this? could that be a possibility? From what I know about a particular franchise in our line of work, each franchise is recognised as a separate company trading as... [naflockies.com] Could that be a way forward?

A franchisor and franchisee don't have fundamental links such as:

Ownership.

Bank accounts.

Equipment.

Financial dependency.

 

[STDFR33]

Some helpful guidance here:

https://www.gov.uk/hmrc-internal-manuals/vat-single-entity-and-disaggregation-manual

 

[Mr D]

Going just over the threshold is not a great place to be. Push hard to grow the business or cut hours / services to be below the threshold and deregister.
And hope the treasury doesn't reduce the VAT threshold any time soon. They appear aware of companies avoiding VAT registration by keeping below threshold.

The expected method of VAT is that you charge the buyers the extra money and they pay it. You just collect the money and pass onto HMRC their share.
Some business owners choose to pay the VAT themselves out of business profits. Of those some have not found out whether buyers will pay more.

 

[Chris Ashdown]

From what you have stated
I cannot put up my prices any higher
I am turning down about 15 clients a week
I am not charging my customers the vat

Rather than worry about what your customers will pay, just tell them you have had to register for vat due to outstanding customer support for your services and like vets and other professionals, unfortunately you now have to add on the vat to there bills

If you lose some customers you have a waiting list to take their place, just dont drop the vat charge on them, notify them by email, letter or phone about the new structure

 

[Scalloway]

it means turning away around 15 clients a week

There is a school of thought that if you are turning business away you should increase prices to the point where you don't have to.

 

[AllUpHere]

If VAT can kill your business, you don't really have a business. Either it's viable to scale, or it's not. If you have to keep it so small you are under the VAT threshold, you are playing at it.

 

[Mark T Jones]

If VAT can kill your business, you don't really have a business. Either it's viable to scale, or it's not. If you have to keep it so small you are under the VAT threshold, you are playing at it.

There is a big element of truth in this

It’s a great time to stand back and decide whether you are simply seeking an income or building a business

 

[BustersDogs]

Hey there, I had this same problem (twice) in my business. The first time my accountant told me to change to a limited company, which 'resets the clock' so I could start again from 0. A later accountant told me that wasn't quite right, so I'm not sure if it's right for you, but check. My idea was to redo my budgets taking into account vat FROM THE START this time, so when I hit the threshold the second time I was able to register on the flat rate and pay VAT. My company was already the most expensive in the area, and it unfortunately co-incided with the big increase in national minimum wage to the 'living' wage (although of course it's not a living wage at all). My staff I already paid higher than that, but to keep the difference between the salary of a new started, and someone with many years experience I had to increase all wages just the same. And of course pensions reared its ugly head at about the same time.

We looked at separating the business into pet care as one business, and training of owners with dogs, and the training I give to other pet care professionals, as well as ebooks I write as a separate one, but that side of the business was much smaller and didn't make much difference. We looked at moving other services over, ones that only I covered (not my staff), but both companies having the same director, using the same vehicles and equipment etc, I felt that wasn't a risk I wanted to take.

I did have a drop in profits, although was still profitable, but when a few of my staff left after a couple of years, I had to make a decision. Push past by growing much bigger to get my full profits back, or downsize to drop under the threshold.

As I had some turmoil with my health, I decided to downsize and now work alone again. I'm looking at new directions for my business, which might not even get to the vat threshold again, but this time I will be ready not just to meet it, but go flying past.

Or I'll semi-retire.

Hope that has given you some ideas, but was quite therapeutic to type out.

 

[STDFR33]

The clock restarts when you transfer to a limited company only if you are not VAT registered (or should be VAT registered).
So incorporating would not help here where the OP is already VAT registered.

 

[Energise Accounting]

VAT is not killing your business. you need to put your prices up by 20% to cover the VAT and e-mail all your clients for the reason why. If they are happy with your service very few of them will move and the few that do should be easy to replace.

If becoming VAT registered is going to do damage to a business then you must ask yourself is it really a business.

 

[AllUpHere]

VAT is not killing your business. you need to put your prices up by 20% to cover the VAT and e-mail all your clients for the reason why. If they are happy with your service very few of them will move and the few that do should be easy to replace.

If becoming VAT registered is going to do damage to a business then you must ask yourself is it really a business.

They wont need to put their prices up by 20 % to cover the VAT. It's a common misconception.

 

[Energise Accounting]

Of course you put your prices up by 20% if a Dogs haircut costs £40.00 you Add VAT of 20% total cost to customer £48.00 an increase of 20%. Any VAT reclaimed you have already paid

 

[Newchodge]

Of course you put your prices up by 20% if a Dogs haircut costs £40.00 you Add VAT of 20% total cost to customer £48.00 an increase of 20%. Any VAT reclaimed you have already paid

While VAT on £40 is £8, the total cost to a business of registering for VAT is not as much as that, so the business owner can choose whether to increase their profit by the amount of VAT they always paid but can now reclaim, or to share that reduction in their cost with clients.

 

[Mr D]

While VAT on £40 is £8, the total cost to a business of registering for VAT is not as much as that, so the business owner can choose whether to increase their profit by the amount of VAT they always paid but can now reclaim, or to share that reduction in their cost with clients.

So could perhaps charge 20% VAT but only increase prices by say 12% or 15%. Presuming that at least some of their outgoings don't have VAT to reclaim.

 

[AllUpHere]

Of course you put your prices up by 20% if a Dogs haircut costs £40.00 you Add VAT of 20% total cost to customer £48.00 an increase of 20%. Any VAT reclaimed you have already paid

As others have said, the OP is trying to stop VAT killing her business. Might be time for a little more thought than just wacking 20% on everything.

 

[Chris Ashdown]

Buyers understand vat at 20% so why not charge it, the vat recovered in purchases is just a bonus to the company, or register for the small traders system (forget what it's called)

 

[AllUpHere]

Buyers understand vat at 20% so why not charge it, the vat recovered in purchases is just a bonus to the company, or register for the small traders system (forget what it's called)

Have you read the OP? They are of the opinion they wont have a business if they have to raise prices by 20%

 

[Mr D]

Have you read the OP? They are of the opinion they wont have a business if they have to raise prices by 20%

But do they know that?

OP is currently turning away clients with the prices as they are.

We can be scared of increasing prices - when the buyers don't share the same fear.

Luckily Apple, Samsung etc don't appear to have the same belief. Or we wouldn't have new expensive phones....

 

[AllUpHere]

But do they know that?

OP is currently turning away clients with the prices as they are.

We can be scared of increasing prices - when the buyers don't share the same fear.

Luckily Apple, Samsung etc don't appear to have the same belief. Or we wouldn't have new expensive phones....

You are right, we can only go on the info we are given though. My point really, was that people seem to think they need to add 20% to their prices in order to stand still when they register for VAT. They dont.

 

[Mr D]

You are right, we can only go on the info we are given though. My point really, was that people seem to think they need to add 20% to their prices in order to stand still when they register for VAT. They dont.

We just need to show the 20% VAT.
Increase can be less, perhaps a lot less. Can even be more.
This time of year may have a few cost increases to factor into pricing too. I'm in the middle of working out new pricing for April onwards, some stuff increasing by 10% retail price and I'm not VAT registered and not planning to register soon.

 

[Paul Kelly ICHYB]

@HD123 I see this far too often, where a business is growing, hits the threshold and then says adding 20% will kill their business. Ultimately, there is only one way to prove that! It is a mindset you need to overcome. In some cases, very scaleable and profitable businesses closed because of the owner's narrow mind.

To soften the blow, tell your clients that you now have to charge VAT, however, you understand this may be a big blow, so will 'split the cost' i.e. put prices up by 10%. This allows you to be compliant and keep your business.

You will not lose all of your clients. You might not get the 15 extra a week, but, if people are happy with the service, they will stay with you.

BTW, when was the last time you generally increased prices?

 

[MJ Holohan]

Hi. Sounds like your business is doing well. It sounds like you are going to need to charge VAT on sales and pass this onto customers. Unfortunately, I don't think there is any way around this. If you are turning away customers maybe you are underestimating the potential to charge more to customers!!

 

[Energise Accounting]

As mentioned earlier the flat rate scheme could be a option. If they are turning away clients there is a possibility they are selling there services to cheap to start with.

 

[ecommerce84]

You don’t have to jump straight in at the deep end - there are a lot of increments between 0% and 20%.

I would put prices up by 6 or 7% and see what happens.

If you don’t lose any customers notch them up a couple of percentage points again.

Keep going until you do lose a customer or 2, the customers you’re turning away will replace the ones you lose.

 

[Graham Tyers]

Putting prices up is always scary. Customers always want to pay less, it's natural.
I would bite the bullet.
a) build an armoury of arguments for yourself and your customers to explain why they don't really want the cheapest option.
b) make the increase out of separate extra products and services that the customer could potentially opt out of one or more rather than turning tail completely
c) try and get 25% extra out of each customer, because you deserve a pay-rise.
d) look around for cost savings in case b) happens
e) enjoy losing a few of the high maintenance, low margin whingealot customers. They take up 80% of your time for no value. You will prolly be surprised and find some of these turn into your most valuable customers even after doubling their prices.

 

[Mr D]

Some of us love our pets. We will spend money on them to get the best treatment, best care etc.
Don't discount what people will pay for the service they expect for their loved one.

 

[Financial-Modeller]

...My turnover is not going to increase from this point as there aren't the hours in the day...

doesn't accord with

...yet I'm having to hire more staff to run the service...

Whilst your VAT issue is visible and of concern to you, you probably need to explain why you're hiring more staff to do the same amount of work. I would guess that is where your problem lies.

Regarding the VAT point, and assuming that you enjoy repeat business, the obvious answer is to increase prices by x% (where x will provide a similar net profit to you after adjusting for VAT registration, so somewhere between 0% and 20% probably) and simultaneously launch a loyalty programme so that you regular repeat customers see a smaller (or zero) increase in the price they pay.

 

[paulears]

I've always been a bit mystified by why people assume it increases prices by 20%, when it actually means many of your supplies will effectively cost less. The suppliers have been charging you 20% too - so the £12 bottle of product now really costs you £10? Loads of your business expenses will include VAT - so the net amount you pay to the VAT man each quarter is the only thing that matters.