VAT registration counter-productive to business

VAT registration counter-productive to business

Didn't find your answer?

I prepare the accounts for a number of sole traders who have experienced that registering for VAT has been counter productive to their business in terms of pitching/securing jobs/sales. Here's the scenario...

A business supplies gardening services to private customers (i.e. non-VAT registered businesses/customers), reached the VAT limit and duly registered for VAT. They were aware that they would be quoting an extra 20% when pitching for work and anticipated that this could end up with them not winning contracts (as they would be up against non VAT registered businesses quoting a lower price). After trading for 6 months, this is exactly what happened and ironically, de-registered as they were trading below the threshold.

The above client did actually reduce their quotes by 10% before adding VAT to burden some of the VAT, but it still affected the business in a negative way. One of the main problems with this business was that materials were sometimes 75% of the quote total, and it is this that effectively takes the client over the VAT threshold. The client is now not registered for VAT, and to avoid going through the above problematic scenario again, when pitching for work, he asks the customer to purchase the materials themselves direct so as to avoid increased turnover. However, he is creeping up to the VAT threshold again and is actually turning away work to avoid going VAT registered.

The problem with the current system is that it's a big leap for a small business to go VAT registered. Even counter-productive to business. My questions is, has anyone else had a similar situation to deal with, and how did you resolve it?

Replies (11)

Please login or register to join the discussion.

avatar
By thomas34
30th Apr 2014 17:27

VAT Registration

I think we've all experienced this and is the result of "cliff edge" taxation.

I'm a little surprised with the figures quoted. Your client reduced prices by 10% before adding VAT bringing the new quote up to 108%, only 8% less competitive than before registration.

If he is buying the 75% materials part of the quote from VAT registered traders (and I've assumed people like B & Q), this will be recovered anyway and should hypothetically not affect his competitiveness much. You are suggesting that the customer is now in some cases bearing the cost of VAT themselves anyway on the material content.

I do have one or two clients who would breach the VAT threshold if for example a carpenter (usually carrying out labour-only contract work) was asked to fit the odd kitchen or two. In those cases they explain their problem to the customer, who accepts that they'll have to buy the kitchen and pay the VAT themselves but that the labour element will be VAT free.

 

Thanks (1)
Replying to Moonbeam:
avatar
By RichardBrown
01st May 2014 09:56

Even 8% is too high

Thanks for your comments, Thomas. Even the 8%, as you put it, did actually have a bearing. 8% of a regular job of £4,000 still works out at £320 more than a competitor, and thus my client not being successful with his quotes.

I think it would be more realistic to my client's business if reaching the VAT threshold was based on his sales invoices less "direct cost" expenses such as materials, i.e. based on the labour/skills portion. In effect, that is happening when my client's customer pays for the materials direct.

Thanks (0)
Replying to lionofludesch:
avatar
By HUGH W DUNLOP
01st May 2014 20:53

VAT

Richard, Your comment about labour only threshold would not work in  respect of many of my clients who are hairdressers and have reached the VAT threshold by accident due to superior service, and naturally pricing. The VAT threshold is indeed a threat to them as it puts them at an immediate 20% disadvantage against competitors who are not VAT registered, though some of them should be, The bottom line is a hairdo is a hairdo, and although superior workmanship is seen as an advantage, many customers do not feel the additional 20% cost warrants it.

I think the answer would be to raise the threshold in such labour intensive trades, and bring back some form of the old purchase tax where truly luxury items, such as a £1000.00 bottle of champagne, were taxed at a higher rate.

Thanks (0)
Replying to lionofludesch:
avatar
By MarkPManning
26th Feb 2015 22:50

I know this is an old thread
But just as reference if someone else stumbles upon this, for materials the company should be charging (excluding any margins they choose to add) the net cost plus vat as they would recover the vat on their purchase. On a £4,000 job with 75% materials and 10% discount over their previous rate, the difference would be £80, not £320.

Thanks (0)
avatar
By zarathustra
01st May 2014 10:05

VAT threshold too high

The real policy problem is that the UK should set the VAT threshold much lower, as in many European countries. This would level the playing field somewhat as all virtually businesses would need to register. Presumably end users (Joe Public) would see some inflationary effect due to that.

Thanks (2)
Replying to gphemy:
avatar
By RichardBrown
01st May 2014 10:25

VAT Threshold

Thanks Zarathustra. A more realistic approach would be to have a "band rate" system similar to income tax. It seems unfair to ask someone to start adding 20% onto their prices just because they've reached a certain level of "sales" even if those sales are largely materials.

Thanks (0)
avatar
By neileg
01st May 2014 10:19

Not sure what you are asking

This isn't a a new phenomenon. The standard approaches to this have been covered, i.e customer buys materials direct to keep t/o down. The other usual trick is to reduce the amount of work taken on to stay below the registration level. It takes a lot of work to make up for the £14k output tax.

Thanks (0)
Replying to Tax Dragon:
avatar
By RichardBrown
01st May 2014 10:31

Therein lies the problem

neileg wrote:

...The other usual trick is to reduce the amount of work taken on to stay below the registration level...

But therein lies the problem. It's counter-productive to growth if businesses are reducing the amount of work undertaken to stay below the VAT threshold. I just think it's a big leap for some businesses to go VAT registered and has a negative effect if their customers aren't VAT registered.

Thanks (0)
Replying to Rebecca Cave:
avatar
By HUGH W DUNLOP
01st May 2014 20:56

VAT

I have a feeling that HMRC have stated that it is an offence to stay below the VAT threshold by this method, though I do not see what they can do about it.

Thanks (0)
avatar
By neileg
01st May 2014 11:18

I think

that the view is that those under the limit are getting a bonus rather than those over the limit being penalised! Doesn't change the sums, though.

As zarathrustra said, other EU countries have a lower limit, indeed some have a zero threshhold, which levels the playing field.

Thanks (0)
chips_at_mattersey
By Les Howard
01st May 2014 18:45

Registration Threshold

More small businesses are finding the 'fiscal cliff' around the VAT registration limit. With a 20% rate, this creates a cost of up to £16,000.

Perhaps we should lobby for the reduced 5% rate for small service-based businesses?

Thanks (0)