Becoming VAT registered- Advice?

unwashed potato!

unwashed potato!

unwashed potato!

Soldato
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I run a company that primarily does cleaning, but also does a small bit of gardening and light removals, of which we significantly plan to increase over time.

we're currently at a turnover of £79k in 10 months and the next 2 months are the busy months so we expect the turnover to be about 20k in the next 2 months, bringing us clearly over the VAT threshold.

it's something i've dreaded for a long time as almost all our work is with consumers so they will be hit by the 20% increase in prices. For instance, our bill yesterday for one site was £240. We already reduced the price from £260 to £240 to get the work due to competition being cheaper. Now we will be £312, I doubt the customer would even ask us to try reduce as it's too big of a gap. When they just want a £20 reduction it's easy to ask, but a £72, not so much. and lets say we do reduce to be competitive and charge £240 inc that leaves us with just £192 on a job we initially priced £260. Rubbish!

I've looked into flat rate and as i understand it would be 12% VAT (though first year is reduced by 1%) but we can't claim the VAT back in purchases?

We don't purchase very much so the VAT saving on items will be small.

Just wondered if an posters on here have been through this and how they dealt with it?

We're looking to increase the work we do with agencies who wont be effected by the VAT charge and may even prefer it, but at the moment i feel as soon as we go VAT registered the work will decrease and now bring us under the VAT threshold again. I can't see how customers will want to pay such an increase.

Would the flat rate be something worth doing over the standard 20% rate?
 
You need to look at what you purchase that has VAT on it and compare that to the VATable services you are providing. If the amount you will be paying to HRMC is greater than 12% x VATable sales then you're best going with the flat rate.

In reality, your accountant costs will be cheaper and admin will be easier if you go with the flat rate scheme. Otherwise it is a lot of paperwork...

There's no way to get around it either unfortunately. When you get to a certain size it is a fact of life :(
 
Just run some theoretical VAT returns on the last few quarters, comparing what actual Sales VAT less Purchase VAT would be compared to Flat Rate 12% (since the discount 1% is only for the first year) - remember this 12% would be on the gross Sales figure (Sales + VAT)

If it's a positive difference then sure, go for the Flat Rate. It also has the benefit of being much easier to administer and you can still claim Purchase VAT on capital expenditure over £2000
 
If your running the flat rate scheme you could potentially reduce your prices slightly to account for the fact that the extra VAT your charging you will not all be handed over to HMRC for example:

Currently you charge £100, customer pays £100.

After VAT registration the same charge is £100 + VAT = £120

Under the flat rate scheme you hand over £12 to HMRC and your left with £108.

Effectively you could charge £94+VAT = £112.80. HMRC gets £11.28, you get £101.52.

Maths are simplified but the concept is the same.

Same goes for if your claiming back your input tax, but you have hinted that might be less favourable.
 
Correct you lower your charges to accommodate + VAT as born2sk8 says

So to the customer the price is the same, but you split it into 80% - 20% on the bill for the VAT man.

If you charged the customer £100 keep doing it, but on the bill put £80 + £20 VAT

Now depending on the VAT scheme you use, simplified is best to start with in most cases, you claw some of it back as above.

Yes you loose some money / revenue in your pocket, but then your business is doing well enough to charge vat and hence more revenue.
 
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Catanonia said:
So to the customer the price is the same, but you split it into 80% - 20% on the bill for the VAT man.

If you charged the customer £100 keep doing it, but on the bill put £80 + £20 VAT
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You aren't doing the maths correct there. Remember the total price (Sale price + 20% VAT) is effectively 120% in total. For every £100 an extra £20 would be the VAT charged on top.

So in your example, your maths is wrong. It's not a 80%/20% split.

For a sale of £80, the VAT is 20% of that = £16. Total price: £96

( It's works out correctly to be a 83.333% / 16.666% split of the total amount to divide it back to Sale Price and VAT.)
 
As someone who has no idea on the subject can't you just split the company, cleaning = A, everything else = B.

You might need another director but?
Sounds illegal, but might not be, worth looking into.
 
( |-| |2 ][ $;29481555 said:
As someone who has no idea on the subject can't you just split the company, cleaning = A, everything else = B.

You might need another director but?
Sounds illegal, but might not be, worth looking into.
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As long as the businesses are separate and distinct, in type of work, income/expense streams etc then it is valid to run them as separate companies, with each being under the VAT threshold. Each being limited will enhance this separation rather than all run under the one sole trader.

But if they are connected trading wise and the split is deemed to be for the intention of keeping each one under the threshold then that is illegal.

I picked up some clients whose accountant had told them to split their business for this reason, one side was running the restaurant, the other side ran the food/drinks from the bar, in the same building. ....I was a bit :eek: and had to sort that mess out.
 
Catanonia said:
Correct you lower your charges to accommodate + VAT as born2sk8 says

So to the customer the price is the same, but you split it into 80% - 20% on the bill for the VAT man.

If you charged the customer £100 keep doing it, but on the bill put £80 + £20 VAT

Now depending on the VAT scheme you use, simplified is best to start with in most cases, you claw some of it back as above.

Yes you loose some money / revenue in your pocket, but then your business is doing well enough to charge vat and hence more revenue.
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As mentioned your calculations are incorrect there. If invoicing £100 inc VAT the bill would be £83.33 + £16.67 VAT.

But it doesn't make sense to keep prices the same or he just loses that £16.67. (ignoring any input VAT recovered)

If he goes standard VAT reg then he needs to be pricing at £120 to receive £100. If he goes flat rate scheme he needs to charge £113.64 to receive £100. This would be billed at £94.70 plus VAT.

OP, if you look at an annual example of say £100,000 turnover your VAT due on that would be £20,000 on standard rate scheme.

On the flat rate scheme it's 12% of the VAT inclusive figure of £120,000 so you'd pay £14,400. The saving is £5,600 but you need to consider your input VAT. If it was greater than £5,600 then standard rate is better but I think that is very unlikely for a cleaning/gardening business.
 
Yup my calcs are wrong a bit, but was trying to simplify it, but a little too much.

Ultimately if his business is doing well, he has the revenue and has to join the big boys club unless he has a Starbucks accountant :)
 
This is why new businesses are advised to take VAT into account for their pricing models from the very beginning as it's incredibly hard to justify an increase in price to a regular customer to cover VAT later on.

Flat rate scheme still lets you claim on big purchases (over £2k I think) so for service jobs it can work out the best route.

You'll probably need to take the hit with existing clients but try to get a bit more out of new customers to cover it and look at getting businesses as clients so you can charge Ex Vat (you still charge 20%)

There will be always be someone who will beat you on price, probably an ambitious new starter who will work for nothing just to get off the ground. What you need to work out is what it is that you offer your customers and then making them see that you are worth the extra.
 
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If you can split commercial work and private work it'll help. VAT just goes round in a circle. To a business very little VAT is non recoverable so just gets passed on.
 
I'm no expert but I'm just going to touch on something which nobody else has mentioned; having to register for VAT is a good thing. It means your turnover is over £83,000. You only need to turnover £100,000 to have the same amount of money in your pocket as now, and I assume you want to grow more than this too.

Think of it as a natural and exciting requirement as a result of growth and it suddenly becomes far less boring and taxing.
 
thanks guys for the replies. i'll have a look at our last 10 months of trading and figure out what we'd have saved/paid in vat and work out what's best.

why is it simpler to go for flat rate other 20% charge? seems more complicated to me. I should say at the moment i have a girl doing my accounts each week and they are currently squeaky clean and up to date, so i'd like to think going VAT shouldn't create too much more work for her.

Russinating said:
I'm no expert but I'm just going to touch on something which nobody else has mentioned; having to register for VAT is a good thing. It means your turnover is over £83,000. You only need to turnover £100,000 to have the same amount of money in your pocket as now, and I assume you want to grow more than this too.

Think of it as a natural and exciting requirement as a result of growth and it suddenly becomes far less boring and taxing.
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yes this is true and i do indeed view it that way.

it's just such a jump in price, 10% VAT is much more friendly, however i'm aware i have benefited all this time while not VAT registered, being able to charge less then the big guys and now heading towards being one partly as a result.
 
Russinating said:
I'm no expert but I'm just going to touch on something which nobody else has mentioned; having to register for VAT is a good thing. It means your turnover is over £83,000. You only need to turnover £100,000 to have the same amount of money in your pocket as now, and I assume you want to grow more than this too.
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Well that's only going to be true if you're doing all of the work yourself and have no expenses.

If say you're employing someone to do all the work (and that's your only expense) and you are making a 30% profit margin, you'd need gross turnover of £190,000 to make the same net profit as a VAT registered trader as a non-VAT registered trader with turnover of £83,000, assuming the flat rate scheme isn't adopted and assuming all customers are not VAT registered so inflexible to the additional cost of VAT. Perhaps an extreme example but shows how much difference the requirement to register for VAT can make, especially considering OP is in a service industry which is wages driven.
 
Fairly sure the answer is no said:
why is it simpler to go for flat rate other 20% charge? seems more complicated to me. I should say at the moment i have a girl doing my accounts each week and they are currently squeaky clean and up to date, so i'd like to think going VAT shouldn't create too much more work for her.
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It is a little simpler because you are just calculating 12% of your sales rather than having to worry about reclaiming your input VAT on expenses. Accounting for VAT is pretty easy anyway so simplicity is not the reason to go the flat rate route. The main reason is to save money.

weringo said:
Well that's only going to be true if you're doing all of the work yourself and have no expenses.

If say you're employing someone to do all the work (and that's your only expense) and you are making a 30% profit margin, you'd need gross turnover of £190,000 to make the same net profit as a VAT registered trader as a non-VAT registered trader with turnover of £83,000, assuming the flat rate scheme isn't adopted and assuming all customers are not VAT registered so inflexible to the additional cost of VAT. Perhaps an extreme example but shows how much difference the requirement to register for VAT can make, especially considering OP is in a service industry which is wages driven.
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How do you figure that out? :confused:
 
Jambo said:
How do you figure that out? :confused:
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i'm guessing here and it's very late, but...

i think he's saying if at 83k turnover lets say our profit is 30% with the staff as the bulk of the cost. Costs are £58k so our profit would be £25k with no VAT to pay.

as soon as we become VAT, turnover still £83k, the vat would be £17k, the costs are still £58k, now leaving only £8.4k profit.

so now to get back to £25k profit, i'd essentially have to increase the turnover by 3 times, because being in a service industry the costs like staff increase the same as turnover goes up.

so now let's say i have 3 times the turnover i had before vat so 3 times £83k = £249k. vat would be £50k. assuming costs are the same per pound taken, triple the costs so that's £174k.

so...

£249k turnover - £50k vat - £174k costs = £25k profit. all because of VAT.


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