Am I now a "proper" business?

Mag90

Hi all,

Forgive the beginner nature of my knowledge on this. Last year during the first UK lockdown I set up a "business" - it is a website selling posters that I hand draw. I have a full-time job alongside this which is PAYE. 

Since then, I've sold £10,000 worth of products and it is ticking along nicely.

I am wondering at what point I need to register as a business and make it "legitimate"?

Facebook are now charging VAT on top of any advertising spend if you don't have a VAT number - so I am looking at becoming VAT registered to recover and avoid this 20% charge on top of advertising. But I am now wondering if it's worth registering properly altogether as a sole trader and wanted some advice based on the revenue figure quoted above? Or is it too early?

Thanks in advance  

Savvy_Sue

Accountant, before you decide on the VAT question. 

If you register for VAT, you will have to charge VAT on what you sell. That means you'll either have to increase your prices, or take a smaller margin. There is something called the Flat Rate Scheme which might benefit you, but I don't know. 

You may not need to register 'as a business', but what you DO need to do is register for self assessment. Precisely when may depend on when you started trading, so when was that? 

Mag90

Savvy_Sue said:

Accountant, before you decide on the VAT question. 

If you register for VAT, you will have to charge VAT on what you sell. That means you'll either have to increase your prices, or take a smaller margin. There is something called the Flat Rate Scheme which might benefit you, but I don't know. 

You may not need to register 'as a business', but what you DO need to do is register for self assessment. Precisely when may depend on when you started trading, so when was that? 

Thank you! Appreciate your response.

I made my first sale in May 2020, so I guess that's when I officially started trading. 

On VAT - I understand you don't have to pay VAT until you hit the £85k threshold. So when you're charging VAT to your customers, I assume that extra 20% goes towards paying VAT once you hit the £85k threshold? 

I will look into the FR scheme!

Grumpy_chap

Congratulations on your success

You may find the following link useful:
https://www.gov.uk/set-up-sole-trader
I will assume that the first sale was within the 2020-21 tax year (that aligns pretty much with first lock-down) in which case you must register as sole-trader by 5th October 2021.  You will also need to file a tax return by the end of January 2022.
There are also others on here that have actual experience as sole traders and can provide comments on the specific ins and outs of things.  

You only have to register for VAT once turnover is projected to exceed £85k of VATable supplies (which I understand the drawings would be).  Below that threshold, registering for VAT is optional.  With turnover of £10k, registering for VAT simply to save the VAT charged by FB advertising could be a false economy:

• Say you spend £1 on advertising and FB then charge you £1 + VAT = £1.20 of which 20 pence is VAT
• Say that £1 of advertising generates £100 of sales (however many drawings that equates to).
• I assume the customers are mostly consumers (not businesses) and the price is market-led.
• That £100 of sales is therefore £100 whether or not you are VAT registered.  At the moment you charge £100 and pay FB £1.20.  Simple.
• If you are VAT registered, you can still only sell £100-worth of drawings for £100 (not £100 + VAT = £120), so the £100 has to be £100 including VAT, which means £83 + VAT of £17.
• If you are VAT-registered, you save 20 pence on FB advertising but give away £17 to HMRC.

Obviously, the figures are all made up, but the idea translates to whatever your actual figures are.

It would be a good time to obtain some advice from an Accountant.

J_B

Mag90 said:

On VAT - I understand you don't have to pay VAT until you hit the £85k threshold. So when you're charging VAT to your customers, I assume that extra 20% goes towards paying VAT once you hit the £85k threshold?

As said, you need an accountant

You are either VAT registered or not. If turnover exceeds 85K, then it's compulsory, but under is voluntary.

If you were registered, then from your 10K of sales you would have had to gie HMRC 1,666.67 - you could claim back the FB vat, but ............. think about it! 

Mag90

Grumpy_chap said:

Congratulations on your success

You may find the following link useful:
https://www.gov.uk/set-up-sole-trader
I will assume that the first sale was within the 2020-21 tax year (that aligns pretty much with first lock-down) in which case you must register as sole-trader by 5th October 2021.  You will also need to file a tax return by the end of January 2022.
There are also others on here that have actual experience as sole traders and can provide comments on the specific ins and outs of things.  

You only have to register for VAT once turnover is projected to exceed £85k of VATable supplies (which I understand the drawings would be).  Below that threshold, registering for VAT is optional.  With turnover of £10k, registering for VAT simply to save the VAT charged by FB advertising could be a false economy:

• Say you spend £1 on advertising and FB then charge you £1 + VAT = £1.20 of which 20 pence is VAT
• Say that £1 of advertising generates £100 of sales (however many drawings that equates to).
• I assume the customers are mostly consumers (not businesses) and the price is market-led.
• That £100 of sales is therefore £100 whether or not you are VAT registered.  At the moment you charge £100 and pay FB £1.20.  Simple.
• If you are VAT registered, you can still only sell £100-worth of drawings for £100 (not £100 + VAT = £120), so the £100 has to be £100 including VAT, which means £83 + VAT of £17.
• If you are VAT-registered, you save 20 pence on FB advertising but give away £17 to HMRC.

Obviously, the figures are all made up, but the idea translates to whatever your actual figures are.

It would be a good time to obtain some advice from an Accountant.

J_B said:

Mag90 said:

On VAT - I understand you don't have to pay VAT until you hit the £85k threshold. So when you're charging VAT to your customers, I assume that extra 20% goes towards paying VAT once you hit the £85k threshold?

As said, you need an accountant

You are either VAT registered or not. If turnover exceeds 85K, then it's compulsory, but under is voluntary.

If you were registered, then from your 10K of sales you would have had to gie HMRC 1,666.67 - you could claim back the FB vat, but ............. think about it! 

Thank you both very much - that was helpful!

I will look into an accountant having a look over things for me but it does seem wise to avoid registering for VAT just yet.

Sandtree

Voluntary registration for VAT generally is only sensible if you either a) sell products that are zero rated (eg kids clothes) or b) are selling most/everything overseas which generally makes things zero rated  or c) almost all of your customers are also VAT registered (ie businesses) so only interested in the net price

Registering before means charging your customers 20% more or having to cut your net prices to maintain the customer price and presumably you already would be charging 20% more if you thought you could get away with it.

Registering as self employed is less harsh than it used to be but generally its better to do it sooner rather than later.

You may not need an accountant right now but would be sensible to have at least a session with one to at least get the basics.

oz0707

Also look into flat rate VAT. My mate had a lower turnover business and I think it can work out better for smaller businesses?

martindow

oz0707 said:

Also look into flat rate VAT. My mate had a lower turnover business and I think it can work out better for smaller businesses?

It can make the book-keeping simpler and be advantageous compared to calculating all of the VAT collected and paid out, but the customer still has to pay 20% extra. 

Sandtree's explanation above should determine whether to voluntarily register and I agree with others that a chat with an accountant is a good place to start.