VAT Man - will he get me???

Lifeisbutadream

JasonLVC wrote:

Now that I know you do joinery I can offer some more advise to a degree.

You will have incurred input tax (that's the VAT you get charged by your suppliers and contractors) as well as for equipment you may have purchased to do your job like tools, etc. If you have the invoices and you've been charged VAT, you can reclaim that VAT back from HMRC once you are registered. The only time it will not work in your favour if your charges are predominantly labour only (ie, hubby provides his skills but not the materials) - but to have a turnover of £72k with one guy means he's either doing an awful lot or your bills include materials.

It is common practice for self-employed building traders to reach the £61k registration limit and then simply stop working. Instead, they'll go work for a local builder/subby and simply get paid a wage (ie, not going through the business). So for 9 months they work for themselves and raise invoices and for 3 months they'll take a 'holiday' and go work for barrat or Persimmon Homes and get paid his minimum wage/get a wage packet. Once the new financial year starts, you go back to your own business with no need to register for VAT. HMRC don't like this practice but can do nothing to you as your hubby is entitled to work for someone-else if he so chooses. As some trades are seasonal anyway, this is a good and legal method for avoiding VAT registration in a growing business. Yes, you'll not be able to do any work for your own company for a few months and the pay packet from your employer will be less than you can make yourself but you avoid the whole issue of registering for VAT, increasing your charges to customers, etc.

Some builders also get their clients to supply materials and the company only supplies labour. This normally keeps the turnover well below the £61k although you need to be careful to not do this for ALL your customers as HMRC could argue you are avoiding VAT by deliberatly not supplying materials theyn would consider intrinsic to the job being done. There's not been any cases where this has been proven in court though, so advise to just do enough to keep below the threshold without making all your clients supply their own materials.

Materials account for around £28,000 - not all of them will have VAT receipts. The rest is made up by contractors - we do a lot of work - such as a kitchen - in 2 or 3 days rather than a week or longer if only one person. Plus we may do a partition wall then an en-suite and contract in a plumber and plasterer. Obviously all of that money goes through our books and we make make a few quid on them for arranging it all.

I never even thought of stopping work when we reached the threshold! too late now anyway! We also need to keep supplying materials because although it doesnt make us much, we get a bit from that too.

JasonLVC

mervyn11 wrote:

JasonLVC
This answers the ladies imminent VAT question but she really needs to get the whole business setup issue sorted dont you agree??

Mervyn11,

Yep, agree that some overall business advice is required - and that's not an admittance of being stupid, running a business can be a nightmare for even the most experienced professional.

Business Link are a very useful resource (I've previously worked in business start-up and regeneration and have had very close links with Business link, chamber of commerce and incubation centres) and they can be a great source of free resources.

Lifeisbutadream

From all the advice above then - agreed that I should come clean - at what point should I tell them then? Do I have to ring and say or shall I do it when I fill in my first VAT return? I think I might be able to play with the figures and try and get the VAT owed to me to more - we have a van and a computer that was bought in the last 3 years - on the website it says that we can claim that back - we also have a hell of a lot of tools bought in last 3 years too. Also we NEED a lot of tools that we have put off buying because we thought we couldnt afford it - looks like now we cant afford not to!

khdgsa

Hi,

I would like to re-iterate a point Mervyn11 made regarding the minimum wage - as you are directors and not employees, these regulations do not apply to you.

One other thing he mentioned that is certainly worth considering is the Flat Rate VAT Scheme. I registered for VAT last year (because it gave a more professional image rather than because of a financial reason), joining this scheme on my accountants' advice. The way it works is that each trade sector has a VAT rate (mines 11%) that you have to pay back, but you charge the 17.5%. Also for the first year you get to keep an extra 1% - this year I expect to make an extra £5000 profit from the VAT - not bad for filling out four forms per year. The only draw-back is that you can't reclaim VAT you pay out - so if you buy in more than you sell, leave it alone !

I hope all go's well - I'm in my third year and would never work for anyone else now I've been my own boss !

JasonLVC

Hang on in there lifeisbutadream, I really believe you can find the input tax you need to balance the VAt account and avoid the whole problem.

Moving forwards, consider the 'holiday' concept as a way of not registering for VAT. Reducing your prices to accommodate VAT will only make your situation worse over time. If you charge VAT, then market yourself as a legitimate, growing business. VAT suggests you have a high turnover and for some clients will be more attractive than an unregistered company that is clearly 'small fry'. I certainyl do not trade with fly by night who are not registered for VAT or who offer to do jobs for me cash in hand (not suggesting you are, just contrasting different clients and approaches). That strong image will be better than trying to compete with the 'cowboys'.

If you don't make a big mark-up on sub-contracted labour then ask the subby to invoice client themselves (but with an agreed price in the original contract agreed by client), again, wiping out his costs from your turnover. Some builders will for instance fit the partition wall then tell client to get the electrics done and then come back to finish the job once sparky's been. You're offering a one-stop service which is great, but perhaps you can say we'll do whole job for £1,000 but £300 will be billed seperatly from our elecitrcal sub-contractor as we can't do that bit. Client still gets a seamless service but you cut out the middleman - works if you'v got good trust with your subbys.

With regard £28k of materials, most of that will have VAT on I'm guessing. If we assume all of it is VATable then that's £4,120 of input VAT you've incurred. If some is not VAtable becuase of what the item is or you used a small local unregistered firm, then you;ve still got nearly the right amount to be in repayment on your first VAt return and avoid penalties. Even if only half is VATable (2,060 you've only got to find another £1,142 of VAT between Nov and March and you'r sailing.). Going forwards, ensure you use VAT registered suppliers and contractors if possible (or at least suppliers).

JasonLVC

Lifeisbutadream wrote:

From all the advice above then - agreed that I should come clean - at what point should I tell them then? Do I have to ring and say or shall I do it when I fill in my first VAT return? I think I might be able to play with the figures and try and get the VAT owed to me to more - we have a van and a computer that was bought in the last 3 years - on the website it says that we can claim that back - we also have a hell of a lot of tools bought in last 3 years too. Also we NEED a lot of tools that we have put off buying because we thought we couldnt afford it - looks like now we cant afford not to!

Calculate the VAT you should have charged on sales since November, you've said this is £3,202 - then calculate any input tax you can reclaim. You can indeed go back three years provided you have a valid VAT receipt/invoice (ie, you've been charged vat) and that the item is still in your possession. That is, assets such as the van/tools/computers, but not materials you've purchased and subsequently used at clients like kitchen doors, unless you've still got them in stock (unlikely).

If needs be, buy some more things now to make sure you are owed money on your first VAt return. If you can do that, there's no need to confess anything as you've done nothing wrong in law. I'm sure with tools in the last few years alone, you'll have enough to get over £3,202. If you do the maths and can't get it up to be a repayment then contact your local VAT office and ask them their advice.

Lifeisbutadream

Thank you so much for everyones help here.

I will remember you all when my business is huge and we are loaded !!

I am going to spend the next few days going through all my accounts and updating my computer systems..

WHA

I've nothing to add to the earlier posters, but put VAT to one side for a moment, and take their advice on running your business differently.

Turning over £72k and only making £26k profit is far too low for a tradesman. You are either not charging anywhere near high enough prices, or you are doing too much via contractors and supplies of materials, or both. Even though you may be making a bit of profit on contractors and materials, they have caused you to exceed the VAT threshold, meaning you lose upto 17.5% of the total.

You are both also working far too many hours for the return.

You need to work smarter, not harder. Price is not the most important factor of getting work, whatever you are told. If he is good at his job, people will want him to do their work, even if he is more expensive than others. Personal recommendation is the key. You don't want customers who are phoning loads of people for quotes as there will always be others who will undercut.

If you sell £5 notes for £4.99 you will have a very busy, fast growing, but loss making business - concentrate on profit, not price.

Out of curiosity, how many quotes result in you getting the work? If you get more than say a 75% success rate, you are probably undercharging. People fall into the trap of dwelling on the jobs that are lost instead of concentrating on the ones that you won. There is absolutely nothing wrong with quoting a fair price and accepting that some customers will go elsewhere. You need to start putting your prices up, a little, and often, and you'll soon find out your customers "pain" threshold when you start getting few jobs (say under 25% of quotes). Then you know your ceiling and can reduce a bit for a few months to get the work flowing again. Your customers price ceiling will be higher than you expect - people WILL pay a premium price for quality and reliability.

You also do need to stop accounting for subbies in your pricing. It is quite common practice (for tradesman clients of mine anyway) to introduce clients to different disciplines of tradesman (i.e. plasterers, electricians, plumbers, etc) and let the customer negotiate directly with them. If you want to do it all, you are effectively more of a "project manager" than a joiner and need to charge a lot more for taking on a completely different role. If they want a cheap joiner, then that is what they get - if they want someone to do the joinery and arrange/plan/control the other aspects, then they need someone more skilled and need to pay more for the privilege. You are also taking a huge risk - what if you buy materials and your customer dies/cancels before you do the work - you may be left with them - what if your subbie plumber damages something - the customer claims against you and you in turn have to hope your subbie will pay you - what if customer won't pay you, you still have to pay your subbie!

I have a joiner client who does kitchens and bedrooms. His gross turnover before expenses is close to £100k, his materials and subbies are less than £10k, he has a qualified joiner working for him for £25k p.a. his other expenses are around £10k. His "profit" is typically £50k per year. They work around 8 hours per day, 5 days max, never works evenings or weekends. He has been established around 5 years and never advertises. He gets all his work via personal recommendation. And, most importantly, this is not London or a big city, it is just an average region that is certainly not particularly wealthy. The current high house prices mean people are extending rather than moving, good tradesmen are in short supply and worth their weight in gold - the industry is not in the doldrums, people working in it should be making their money now while money is in plentiful supply.

Don't try to please everyone, you need to earn a living, start charging the proper prices and work on reputation and repeat/referred business. Find a niche market and stick to it rather than be a general joiner.

Lifeisbutadream

WHA wrote:

I've nothing to add to the earlier posters, but put VAT to one side for a moment, and take their advice on running your business differently.

Turning over £72k and only making £26k profit is far too low for a tradesman. You are either not charging anywhere near high enough prices, or you are doing too much via contractors and supplies of materials, or both. Even though you may be making a bit of profit on contractors and materials, they have caused you to exceed the VAT threshold, meaning you lose upto 17.5% of the total.

You are both also working far too many hours for the return.

You need to work smarter, not harder. Price is not the most important factor of getting work, whatever you are told. If he is good at his job, people will want him to do their work, even if he is more expensive than others. Personal recommendation is the key. You don't want customers who are phoning loads of people for quotes as there will always be others who will undercut.

If you sell £5 notes for £4.99 you will have a very busy, fast growing, but loss making business - concentrate on profit, not price.

Out of curiosity, how many quotes result in you getting the work? If you get more than say a 75% success rate, you are probably undercharging. People fall into the trap of dwelling on the jobs that are lost instead of concentrating on the ones that you won. There is absolutely nothing wrong with quoting a fair price and accepting that some customers will go elsewhere. You need to start putting your prices up, a little, and often, and you'll soon find out your customers "pain" threshold when you start getting few jobs (say under 25% of quotes). Then you know your ceiling and can reduce a bit for a few months to get the work flowing again. Your customers price ceiling will be higher than you expect - people WILL pay a premium price for quality and reliability.

You also do need to stop accounting for subbies in your pricing. It is quite common practice (for tradesman clients of mine anyway) to introduce clients to different disciplines of tradesman (i.e. plasterers, electricians, plumbers, etc) and let the customer negotiate directly with them. If you want to do it all, you are effectively more of a "project manager" than a joiner and need to charge a lot more for taking on a completely different role. If they want a cheap joiner, then that is what they get - if they want someone to do the joinery and arrange/plan/control the other aspects, then they need someone more skilled and need to pay more for the privilege. You are also taking a huge risk - what if you buy materials and your customer dies/cancels before you do the work - you may be left with them - what if your subbie plumber damages something - the customer claims against you and you in turn have to hope your subbie will pay you - what if customer won't pay you, you still have to pay your subbie!

I have a joiner client who does kitchens and bedrooms. His gross turnover before expenses is close to £100k, his materials and subbies are less than £10k, he has a qualified joiner working for him for £25k p.a. his other expenses are around £10k. His "profit" is typically £50k per year. They work around 8 hours per day, 5 days max, never works evenings or weekends. He has been established around 5 years and never advertises. He gets all his work via personal recommendation. And, most importantly, this is not London or a big city, it is just an average region that is certainly not particularly wealthy. The current high house prices mean people are extending rather than moving, good tradesmen are in short supply and worth their weight in gold - the industry is not in the doldrums, people working in it should be making their money now while money is in plentiful supply.

Don't try to please everyone, you need to earn a living, start charging the proper prices and work on reputation and repeat/referred business. Find a niche market and stick to it rather than be a general joiner.

Thank you! This really does help - I think that we are probably trying to be too general - we also like to help everyone who rings! he goes out pricing 2 to 3 nights per week - sometimes miles away!

The example above makes me think - my OH is a fantastic joiner who can turn his hand to everything - but lie you say we probably do need to find a niche - and as for the project management - I do all that, but ont charge extra for it, just add a bit on to the bill, but obviously nowhere near enough.

mumhancox

Hi Sorry to join in lat, but just looked at your figures and you say you do the books, not trying to be nosey but you see to be paying ahell of a lot of nic and tax, I am sure there is something not right there, not an expert but think you would be very wise to see another accountant, for a freebie chat, (Often first chat is free)