Should he be paying VAT?

Inamuddle

My partner has run a franchise for the last 6 years. The company told him to register for VAT and he is on the flat rate scheme.
I am confused as his profits have never gone over 30k. He has not registered voluntarily and his profits are not anywhere near the 63k (is that right?) where it becomes compulsory. Should he be paying VAT?

a11waysindebt

Hi,

Do you know his total turnover every year.

Murdina

The threshold for VAT is based on turnover, not profits. The current rule is:

"You must register for VAT if:

• at the end of any month the total value of the taxable supplies you have made in the past twelve months or less is more than the current threshold - £64,000 or
• at any time you have reasonable grounds to expect that the value of your taxable supplies will be more than the current registration threshold - £64,000 - in the next thirty days alone."

Your partner may well have a turnover (taxable supplies) in excess of this and only make profits (ie turnover less expenses) of 30K.

JasonLVC

VAT Threshold is based upon turnover, not profit.

If his TURNOVER is less than £30k then he did not need to register for VAT and has done so, 6 years ago, on a voluntary basis.

If his PROFIT is £30k, then I can only assume his turnover way exceeds whatever the VAT threshold would have been 6 years ago or today (£64,000).

It may be mandatory requirement of the franchise for a franchisee to register for VAT (to give the impression of size and respectability). Depending upon the nature of the franchise and whether customers are businesses or individuals, it may no longer be appropriate for him to be on the Flat Rate Scheme and so may need to consider going onto the normal VAT scheme.

The Flat Rate Scheme is easier to administrate but denies him the ability to recover any VAT on expenditure thus reducing profits overall. If he is VAT registered regardless of whether the customer can recover VAT or not (ie, whether the customer is a business or private individual) then he might as well go onto the normal scheme and recover VAT on business related expenditure such as equipment and supplies that are no doubt a requirement of the franchise anyway.

Go and seek advice from an accountnant on this. Meanwhile, if you can let me know what kind of franchise this is (ie, mobile tyre repairs, burger joint, etc - without naming names!) then I can advise further.

Murdina got in there first but then my post was longer, so there!.

Inamuddle

Thank you for all your replies. You are right, it is a mandatory requirement of the franchise company to register for VAT. My partner's turnover has never exceeded 50k. The franchise is a car wash! I still don't understand how the franchise can force him to register for VAT. Thanks again!

moonrakerz

You can register for VAT below the HMRC threshold. If that is in the Ts & Cs of his franchise agreement, he signed up to it !

JasonLVC

As per last post, if the T&C of the franchise is that you have to register for VAT, then he has to register for VAT.

Sorry, I've just realised partner is already on the Flat Rate Scheme. In that case, he may wish to switch to the ordinary scheme. Let me explain :-

Ordinary VAT scheme, you charge VAT on top of your fees (eg. £10.00 + VAT of £1.75) so customer pays £11.75 for a car wash. You pay £1.75 over to HMRC and keep the £10.00 for yourself. You can also now recover any VAT on expenditure such as electricity, repairs to th wash, consumables, etc.

Flat Rate Scheme simply looks at your turnover and you apply a % to that amount and pay it over to HMRC. The % you apply is based on a table published by HMRC.

For example, your annual t/over is £50k. You take that figure and apply the % for your sector (I think it should be "other retail" at 6%). That gives a VAT amount due to HMRC of £3,000 whereas under the normal scheme you'd have paid over £7,446 (which is the £50k t/over x 7 / 47 to find the VAT element of that £50k).

A difference of £4,446. Now before we get all excited, the downside to the flat rate scheme is that you cannot reclaim any VAT on expenditure except upon capital equipment over £2,000.

So, if your partner recovers less than £4,446 VAT per year on repairs/consumables then he's beter off on the Flat Rate Scheme. So partner will need to do the maths to see if this will be of benefit. HMRC have a useful tool that will help with the numbers / deciding whether Flat Rate or Ordinary is better :-

http://vatreadyreckoner.hmrc.gov.uk/

If he is better off on the ordinary scheme in terms of recovering VAT on consumables, etc then this may increase bottom line profitability and is no extra admin for him.

Inamuddle

Thanks so much for your input. Will look into the flat rate scheme. Thanks again!