I run a small Practice, last year my income was just below £68k but this year I will be reaching the VAT threshold level as I have gained more cleints and as a result my fees will be increasing my 20% because of VAT registration. I wanted to kindly ask others how did you manage the situation when you registered for VAT. One of my client has indicated to me that he will find a cheaper Accountant if I increase my fees by that much even though I explained to him that this a legal obligation.
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The legal obligation is to charge vat. There is no legal obligation to increase your fee by 20%. So I don't blame the client.
Truth is you either take a hit on your margins or you dump a few clients, that's the only way to avoid losing clients if you plan to add 20% on top.
That being said it would depend on the client base I guess. Any vat reg clients probably won't care but if you mainly do self employed non vat, I doubt they'd be happy.
Thank you, I have only 3 vat registered and the rest are not so I may have to take a hit on my margins.
Do the numbers. The hit on your income could be greater than simply losing some of your fees to keep you under the threshold.
All depends on whether the timing allows it of course.
Before you rush into just 'taking a hit on (your) margin' ... stop and think.
As you move towards being VAT registered, you will of course need to start thinking about your own accounts (not just cashflow) ... which means treating turnover as ex-VAT. So what will be your new (current) total revenue (£58k+)?
Now look at your costs and work out either where you have some wiggle-room in running the practice on that basis - or what you need to achieve in terms of additional revenues (to get back to where you were - or for planned growth).
This may bring to light 'opportunities' that you've not previously considered:
* Can you target some more VAT-registered businesses (where you can compete more easily)?
* How about taking a short-term hit by hiding the VAT-driven increase within a more general increase due to MTD (even if that means tying clients to a 3-year schedule where your margins only fully return in 2/3 years, but on the back of increased growth)?
In short, I know it's a cliché, but see this as an opportunity not a problem - and it just might give your business the spur that it needs.
Thank you so much, a small fee increase of say 6% this year is a great idea and I will also target VAT registered businesses too.
Tell clients that you are sorry it has happened. Problem is you’ve gained a reputation for competence and expertise, more clients have joined and the price of success is a penalty from HMRC.
The upside for them is having an accountant of such high regard. Quality remains after the price is forgotten etc.
Try not to spend too long before hitting £100K+.
Good luck, here’s to a bright future.
To paraphrase Hugo... hold your horses!
From your reported straw-pole of one client, you can't base your pricing strategy on that alone. If one client 'takes the hump', you lose one client. If you effectively reduce all client fees to avoid losing that client, you effectively lose 1/6 of a client per client, across the board! What is more, if other clients get wind of the idea that threatening to about-turn every time you talk money, you'll join the race to the bottom!
There will ALWAYS be a cheaper accountant*... VAT, or no VAT - it makes no odds. Is cheap always better? Do they actually do a good job? Do they offer the same service? Are they even legit? Even 100's of positive Google reviews doesn't always mean they're good! Unfortunately, it sometimes takes clients exploring the competition for them to realise the grass is not always greener.
If BT increased their prices by 10%-20% in a year (which is not unrealistic), there'd be thousands of people complaining/ grumbling. "I'm going to my MP", "I'm switching to Virgin", "I'm getting a 5G hub"...! How many people actually leave? Minimal! Why? Because, like or lump it, they're one of the best of a bad lot! I'm certainly not saying you're one the the best 'bad' accountants (!!!) but, you get my drift!
If you're good at what you do, and if your clients appreciate you, they'll stick with you. Besides if your only fee increase this year is 20% in VAT, you're not really that many miles behind inflation (and well below the price increases of the last 2 years for many raw materials... building, manufacturing etc)!
Now, I'm not saying don't make allowances! Some clients can't (not won't) afford a 20% increase, others will be that key to your practice that you will wish to ease them in gradually. However, the ones who try to blackmail you with "Increase my fee and I'll walk" are unfortunately, often not worth bothering about. They'll only do the same next year when you try and charge an extra 2%!
Incidentally, and to pick up on Hugo's 'opportunity' aspect, albeit with a different twist... would any of your clients actually benefit from voluntarily registering for VAT themselves? I have a good number of clients trading comfortably below the VAT threshold who are actually (financially) better off being registered! VAT is not always bad... particularly if you trade primarily with businesses! Worth a thought but, I'd guarantee a quick look at your client book will identify clients who could potentially be better off!
Don't take a knee-jerk reaction! Good luck!
* On fees, a client came to me last week saying his mate's accountant only charges £7 per hour! I gasped (well, I didn't but the censors wouldn't allow my true 60-second tirade of expletives). Once I'd composed myself I asked what exactly they did for that, and where they were from. It turned out, not only were they based overseas, they also provided 10-hours per week of work. It seemed a bit excessive for a sole director, sole employee, plumbing company but, hey ho! Each to their own!
Meh just do it. If your clients like you, they will stay.
I think a lot of the time people "look through" the VAT anyhow, that is to say they look to see if the price is fair and dismiss the VAT as "annoying" rather than your fault.
The main issue I see is managing this AND general inflation so you might end up with a 30% hike in one year so need some thinking about.
"One of my client has indicated to me that he will find a cheaper Accountant if I increase my fees by that much even though I explained to him that this a legal obligation. "
But you have no obligation to increase your fees (cash cost to client) you are choosing to up their fees !! - its not their fault you are going vat registered - so 20% increase in fees will hurt enough for some clients to leave if you don't soften the blow sufficiently - lets be honest here its your choice to charge em more not something you have to do.
Note if you charge 20% more and claim back input vat you are keping some of the uplift in fees being charged to customers - so there is deffo something in the pot to compensate the needy - fair middle ground here is to spread hit over more than 1 years bill for good customers who moan.
We work from business premises and charge from vat - we make clear to all non vat registered clients who ask if our quoted fees are an issue ithen they may be best served by non vat registered accountant working from home !! - we simply cant compete on price point. No harm being blunty honest in that regard then choice is theirs to make.
Practicably speaking you are better placed than anyone else to make decision as to whether smaller fee is better than no fee at all - thats choice you always face when you up fees or client says they cant afford your current fees.
Same as I would advise clients. First decide at the outset of your business if the size of your business will require you to register for VAT, take on employees or any other similar transitions, and then build your customer base and pricing levels at the outset around where you plan to be/size of your future business.
Being where you are now, it is a case of making a clear business decision to grow or not. If you decide that you do wish to grow to the point where VAT is at issue, accept that during this transition stage you will lose some clients and need to win others, where VAT is not at issue.
All you are doing is moving up the client food chain (for want of a better expression) and VAT registration is a sign that your Business/Practice is growing up.
Just run 2 completely separate* businesses, one VAT reg the other not.
* and I mean completely separate, otherwise it is not a good idea
Surely this runs the risk of artificial separation?
If the practice currently operates as a sole trader and had intentions in later years to incorporate, the practice could incorporate before hitting the VAT threshold, the turnover resets and the VAT threshold limit starts again.
This then gives the practice owner some breathing space to grow the client base, taking on larger VAT registered clients who will not feel the impact of a VAT registration when it becomes due, and by then the smaller clients who are bothered by a fee increase may not be a critical source of income.
I operate as a Limited company, I believe they will be new Directors/partners as we grow especially if I find the right partner, having separate practice for VAT registered clients and unregistered is something that I may struggle to manage & complicates everything but if it can be done why not try it.
I had assumed that Arthur's suggestion was made with his tongue so far up his buccal region that injury was likely to result.
However feel free to take it as a possibility if you're prepared to endure the ardour of setting-up & maintaining separate operations that will sufficiently convince HMRC to leave them separate for VAT registration purposes.
Maybe consider the FRS as this may be more favourable to you (depending on the costs you incur). You might not need to increase prices too much in order to maintain your current margin