VAT question

boneo

I have a bit of a catch 22 situation with VAT and my small business (service based). I am approaching the VAT threshold and will need to register soon, but if I start charging my clients VAT (all who receive a regular service and monthly bills from the company) I will definitely lose some of them, bringing the threshold back down under again. It will also be very hard for me to get any new clients on board to bring it back up again as in the business I work in nobody else charges VAT!
HELP!

Pennywise

Firstly, work out what it will actually "cost" you. You don't have to increase your customers' prices - you could absorb the VAT meaning they pay the same but you get less to keep, BUT, on the other side, you'd be able to reclaim input VAT charged to you. If you don't have many expenses with VAT charged to you, consider the flat rate scheme. You may find that you don't suffer as much as you think you will. There is absolutely no rule that you have to increase your prices at all, it's just that from the date of registration, some of your income will be VAT. Have you thought about charging VAT to some clients and not to others - i.e. charge those who are VAT registered and who you think may pay more, but absorb the VAT for customers who are likely to walk away.

Secondly, if the above still proves to hard to swallow, think about just getting rid of a few customers, or not take any more on, to keep you below the VAT threshold.

You've hit upon one of the most stupid rules that actually stops small businesses growing. It's been mentioned time and again to MPs, lobby groups, etc., but no-one has seen fit to find any form of solution. This is exactly why a lot of small businesses tend to stay small and some businesses actually close down for a few weeks when they get too close to the threshold - I know several fish & chip shops who close for extended holidays for this very reason and only open say 40 weeks of the year.

JasonLVC

The easiest solution for MP's is to adopt the same threshold as the other European countries.....which is between Nil and 33,000 euros (£20k) - so as a country, we aren't too badly treated regarding VAT.

Boneo, what is your trade?

boneo

Thanks very much for your input...the trade is dog walking and so most clients are paying a daily fee. To suddenly add VAT to each walk would be a huge increase and would price me out of the market completely. There is alos the risk of losing some clients who may feel that the service is now too expensive...

JasonLVC

Sounds like you have a very profitable and growing business there.

It also sounds like that you have very little overheads and therefore input tax (the VAT you can reclaim on purchases your business makes for the business).

So I can see how registering for VAT will be an issue for you - you cannot offset any VAT increase by lowering your prices on the basis of recovering input tax to keep your cost ratio the same as you have so little input tax.

The legislation does allow you to request exemption from registration but only if the turnover has exceeded the threshold becuase of a one-off job/contract. For instance, if you were a builder usually hovering around the £65k a year mark but then did a big job worth £20k it'd take you over the threshold but as a one-off you'd be back below the threshold again, HMRC will allow you to be exempted from registration - but you can only really have one bite of that cherry so to speak.

You are aware that the threshold is a rolling £68k and is not actually based on your annual turnover?. In effect you take your income for August 2009 and add up all the income back to August 2008 and then you do this each and every month for ever and when you reach the £68k threshold using that calculation - that is the time you need to register for VAT. Although I suspect if you are always that close to the limit it'll always be stressful calculation to make.

Becuase of your particular set-up, there probably isn't much you can do other than to decide fi you want to expand (or franchise it), or stay the same size/shrink to avoid the VAT. It is a dilema I agree and as you are mostly B2C VAt will affect your customer numbers.

You could consider splitting your business into two (ie a sole tradership + ltd company) and split the trades and income - but this is a dodgy area of VAT and can lead to HMRC seeking to unsplit the business (dis-aggregation they call it). It is not illegal to do this but it is something that HMRC have powers to correct and apply penalties to if your caught.

As Pennywise has already stated, the alternatives are to take a short sabbatical and not do any work for a few weeks/month and this will then affect your rolling turnover calculation as described earlier - many builders stop working for themselves when they get close and then go work as a on a bigger site as a temporary employee and just get a take home wage/pay NI etc as an employee, nothing going thrugh the company books and this is perfectly acceptable - but you don;t have that luzury of going to work elsewhere and earn a crust, you not working will lead to no income at all.

boneo

Many thanks Jason. You have been really helpful - even if I am sill no better off really. Unfortunately the sabbatical is not an option as I would not have any other income, and it would force my employees (dog walkers) out of work! It seems such a shame that I would be unable to grow the business because of this...I wonder how other dog walking companies get around the VAT issue as none of them seem to charge it!

sdooley

You could change your business over to an agency basis and just take a cut of the fee from the dog-walkers - but would the good ones decide they could just go it alone? Tricky.

James,_Oxford

It might be worth your while having a look at the VAT Tribunal case of RE & RL Newton (LON/2000/84 No 17222).

This case concerned a carpenter who effectively 'disaggregated' his business. He formed a partnership business with his father and a separate partnership business with his mother. The fomer was VAT registered, the latter wasn't. In fact the latter was specifically set up to do work which would have otherwise been lost to unregistered competitors.