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Is VAT deregistration the answer? How to monitor?

VAT is sinking our hair salon. If we deregister how do we monitor staying within the threshold?

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We bought an established hair salon last year as a 'transfer of a going concern'. It was already VAT registered so the new Ltd Co has been VAT registered since purchase (Flat Rate scheme 12%, including 1% year one trading discount; we don't spent much on stock so reclaimable amounts would be modest). We have 7 staff, all part time, all TUPI'd over. We expect 12mth turnover c.£95,000. However due to three new competitors locally there's pressure on sales and with rising costs/rates/wages the VAT bill keeps wiping us out. Growth significantly above £100k will be tough. We've removed 2 staff members and another will soon go. We're going to close 1 or 2 days a  week so everyone is working the same pattern.

If we de-register for VAT on the basis we currently believe we'll now be within the threshold next 12mths, how do we best monitor our level of sales? Just use a cumulative 12mth figure starting from today?

For the sake of the staff I'd really like to avoid arbitrarily closing for 3-4wks in November just to stop sales (we declare 100%, I know many don't :-| Staff keep their tips)

If we accidentally go over by a few pounds would that mean we'd automatically owe 13% on the full 12mth sales?

Our decision/timing is complicated by a key member of staff being on maternity leave. It's a cost we'll ultimately get back but we can't quantify what extra income she'll generate if/when she returns, so we may need to restructure again in a couple of months if many clients do return for her.

We originally registered in February. Our financial year end is February.

All advice and any tips very gratefully received!!!

P.S. We're meeting our accountant on Monday, but the more you know...!!

Replies (29)

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By zarar
16th Jan 2020 03:34

This is a forum for professional accountants. You need to sit down with your accountant and let them help you work all this through

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By lincolnartist
16th Jan 2020 06:33

Just wait until Monday. It's only a few more days.

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By atleastisoundknowledgable...
16th Jan 2020 08:05

“ ... how do we best monitor our level of sales?”

However you want to do it, each month you need to look at the last 12 months income. If some of that 12 months includes the period before you bought it, you have to include those as well (ie you can’t say you bought it on month 1).

Eg at the mo you should be looking at the total income for Jan 19- Dec 19, in a few weeks time Feb 19 - Jan 20 etc etc.

I would use a spreadsheet with column A listing the months, column B each month’s income. As soon as you know the sales figure for last month, add that to the bottom of your list and delete the top row - you will always have the last 12 months total income easily to hand. Let your accountant know as soon as you drop under or go over the line.

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Replying to atleastisoundknowledgable...:
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By Tax Dragon
16th Jan 2020 10:07

You always have a technological answer, don't you atlea?

I was thinking the OP'd have to use the old trick of measuring the money by height - isn't £1,000 3 metres tall?

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Replying to Tax Dragon:
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By lionofludesch
16th Jan 2020 10:31

Not if it's in pennies.

Twenty years ago, folk would've laughed at the notion of setting up a spreadsheet for summat so simple .....

Sad that we rely on computers so much these days.

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By Roland195
16th Jan 2020 09:53

To answer your question broadly, no I don't believe VAT de-registration is the answer, at least not exclusively.

When you say "we" are any of you stylists working in the salon? I'm struggling to see how 7+ staff only turnover £95,000.

I suggest you have your accountant (hopefully not the same clown who advised on the purchase though) look in to the over all viability of the business under it's current form.

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Replying to Roland195:
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By MegaMatts
16th Jan 2020 11:21

Hi Roland

Staff are part time and work 1-2 days a week (it works well for child care and if anyone is ill they cover each other etc.)

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By bernard michael
16th Jan 2020 10:00

If you've removed 3 staff members surely your turnover will drop by a significant % and be below the VAT threshold.
Alternatively
Reduce your prices by 5- 7.5% to take on the opposition. This could increase turnover & profitability due to the decreased wages costs
Look carefully at your business plan to see whether you will make a profit worth the effort you are putting in
I act for several hairdressers both large & small and am fully aware of the problems faced by marginal businesses in the industry

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By lionofludesch
16th Jan 2020 10:05

Don't forget that you'll need to pay output tax on all those assets you have on hand at the date you deregister. How much would that be ?

It's a judgement call. How far are you under the limit ? How long will that last ? How smart are you at monitoring turnover ?

As an aside, you say you don't pay much for stock. I hope you pay enough to keep you out of the 16½% bracket.........

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Replying to lionofludesch:
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By MegaMatts
16th Jan 2020 10:29

Many thanks lionofludesch

We've never claimed input tax. We run with £300 of stock and all our equipment/fixtures are a few years old so of relatively nominal marketable value.

We spend £7,000 a year on stock so comfortably above the 16.5% higher rate threshold, fortunately!

Our first 12mth ends in February when we think we'll do total sales c£93,000. We're definitely on top of our spreadsheets, including cumulative figs :-) :-(

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Replying to MegaMatts:
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By lionofludesch
16th Jan 2020 10:33

So deregistration doesn't seem to be an option.

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Replying to lionofludesch:
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By MegaMatts
16th Jan 2020 10:46

Do you disagree with Neil's (https://www.accountingweb.co.uk/tax/business-tax/vat-registration-tips-f...) point that historic turnover is irrelevant as deregistration is based on future assumed sales? (I very much appreciate VAT is a minefield)

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By Wanderer
16th Jan 2020 10:13

Government has meant to address this 'cliff-edge' problem for a few years. What they've actually done is freeze the VAT threshold which will make it a problem for more and more businesses as time goes on.

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Replying to Wanderer:
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By Tax Dragon
16th Jan 2020 10:24

Could you have a system where you didn't need to account for output tax on the first £80k (or whatever) of turnover?

Has that ever been suggested?

I know this is no more use to the OP than my previous comment, but the problem (which has only worsened with time as VAT rates have gone up) doesn't sound insurmountable.

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Replying to Tax Dragon:
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By Wanderer
16th Jan 2020 10:36

That could work. We seem to have a system whereby (generally) the first £12,500 isn't taxable, so you should be able to apply similar to Output Tax. Would put all businesses on the same footing as well.
Would take some thought though. If a business bought from another business with £86,000 turnover, what would be the input tax of the purchasing business?

Another option often put forward is eliminate VAT on B2B transactions. That too brings its own problems though.

Surely it's not beyond the ability of HMRC to advise HMG on a system which is both politically acceptable (their main concern) and avoids the problems illustrated in this thread (a lesser concern for them).
There again it's HMRC that are behind MTD.....

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Replying to Tax Dragon:
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By lionofludesch
16th Jan 2020 10:38

Tax Dragon wrote:

Could you have a system where you didn't need to account for output tax on the first £80k (or whatever) of turnover?

A marginal relief might be better.

The cliffedge tends to hit retailers hardest as their customers look at the money tyey pay over rather than tge tax exclusive price.

VAT is largely a tax on retailers, despite being advertised as a tax on consumers

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Replying to lionofludesch:
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By MegaMatts
16th Jan 2020 10:44

I honestly thought it would be easier to trade up and over the VAT hurdle but the market is extremely competitive and consumers very sensitive (who wants to pay % more than the one man band down the road?!). We haven't taken an income from the business in 9mths in an effort to maintain jobs. It's depressing and distressing just how many SMEs and hairdressers in particular I've spoken to in recent months who have been forced to downsize their business (from 5-10 staff down to 2-4) &/or cash flow has dried up &/or continue to fiddle their books (many despite having previously been caught and penalised by HMRC!!). It's a mad system that should be tapered in some way.

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Replying to MegaMatts:
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By bernard michael
16th Jan 2020 11:00

MegaMatts wrote:

I honestly thought it would be easier to trade up and over the VAT hurdle but the market is extremely competitive and consumers very sensitive (who wants to pay % more than the one man band down the road?!). We haven't taken an income from the business in 9mths in an effort to maintain jobs. It's depressing and distressing just how many SMEs and hairdressers in particular I've spoken to in recent months who have been forced to downsize their business (from 5-10 staff down to 2-4) &/or cash flow has dried up &/or continue to fiddle their books (many despite having previously been caught and penalised by HMRC!!). It's a mad system that should be tapered in some way.


Hence my point about whether it's worth the effort. Please seriously consider stopping now while you still have your sanity. You appear to be running the business to give the staff jobs - ( madness)
Did you get any turnover indemnities in the price when you bought the business ?
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Replying to bernard michael:
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By MegaMatts
16th Jan 2020 11:45

Thanks Bernard

Up to a point you are correct (it is mad!); consumers expect a welcoming atmosphere in a salon (created by having 2-3 staff in with clients in parallel) and although staff are happy to work alone I never allow it due to safety/security. There's a balance (and technology like CCTV and panic buttons) which is why I believe removing 1-2 staff and consolidating hours to only open Weds-Sats will accomplish what we need, just a cheeky profit!

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Replying to MegaMatts:
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By lionofludesch
16th Jan 2020 11:22

MegaMatts wrote:
It's a mad system that should be tapered in some way.

In some EU countries, VAT registration starts at €1 turnover.

Problem solved.

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Replying to lionofludesch:
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By MegaMatts
16th Jan 2020 11:33

I'd be happy with £1 for every one or £1m under similar schemes!

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By MegaMatts
16th Jan 2020 10:39

Many thanks for contributions all. I've found AccountingWeb a REALLY useful resource.

For future readers of this post you may find Neil's article useful: https://www.accountingweb.co.uk/tax/business-tax/vat-registration-tips-f... - and his key point on voluntary deregistration that historic turnover is irrelevant deregistration is based on future assumed sales. Although we'll be covering both bases (historic 12mth sales AND forecast) and ensuring our records are 100% clear on what we're doing and why!! I'm looking forward to speaking to our accountant before taking action ASAP.

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By Red Leader
16th Jan 2020 11:54

Based on my experience of single salon hairdressers as clients, most struggle. Just exceeding the VAT threshold makes the struggle worse. And then there's the periodic squeeze from the landlord. My advice to those clients is to forget the enormous hassle of running a salon and become an employee or rent a chair at someone else's salon.

Sorry not to be more helpful.

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Replying to Red Leader:
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By bernard michael
16th Jan 2020 12:06

Red Leader wrote:

Based on my experience of single salon hairdressers as clients, most struggle. Just exceeding the VAT threshold makes the struggle worse. And then there's the periodic squeeze from the landlord. My advice to those clients is to forget the enormous hassle of running a salon and become an employee or rent a chair at someone else's salon.

Sorry not to be more helpful.

My advice exactly. It's not an industry for start ups. Despite that they still try and end up making life more difficult for all the others locally
I've a client with a busy 20 seat salon and even he finds the going tough

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By sally1964
16th Jan 2020 12:42

Speak to your accountant - they should be able to provide a simple spreadsheet to monitor last 12 months - and compare it to vat limits etc.

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Replying to sally1964:
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By MegaMatts
16th Jan 2020 16:14

Thanks for taking the time to reply Sally - I've been using some fantastic spreadsheets since Day 1 but now we're in month 11 it's obvious things are not sustainable :-(

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By MegaMatts
16th Jan 2020 16:33

So all you accountants will hate me for this, but I dropped in on our accountant unannounced this afternoon for a chat... :-)

Neil Warren's advice on voluntary deregistration is very clear (https://www.accountingweb.co.uk/tax/business-tax/vat-registration-tips-f...) however, despite planning to remove 2 staff and closing 1-2 days a week, our accountant's opinion is that HMRC are extremely unlikely to approve our deregistration request until 4 consecutive VAT returns show reported sales below the threshold.

His recommendation is that we submit our Q4 VAT return in March (which will show 12mth sales modestly in excess of the threshold, unless we close all February) and that we draw HMRC's attention to the fact our latest 2 quarters sales were lower and will remain such over the next 12mths due to a restructure/downsizing.

This contradicts Neil Warren's advice but it is our accountant's experience that the majority of deregistration requests get declined until the 12mths reported cumulative sales fall within the threshold (which is mad and not forward facing at all).

I'm now wondering if our accountant is just wrong, if HMRC's approach has changed in the 2yrs since Neil published his article, and whether I have anything to lose by sending a deregistration request letter to HMRC setting out our plan and figures...?

Because we have to state 12mth sales on the online deregistration form, our accountant is of the view HMRC will probably kibosh it immediately, so we'll just end up having to wait until the following Q1 return in June to evidence the full year's sales are down.

If this is true I'm disappointing HMRC aren't more pragmatic (I've only ever had positive dealings with them).

Thanks again,

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Replying to MegaMatts:
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By Manchester_man
17th Jan 2020 15:18

Your accountant’s experience is very different to mine.

I have deregistered several clients over the past 2 years, the most recent being a beauty salon who was trading above the threshold and was in a very similar situation to yourself.

They decided to reduce staff numbers and we projected a reduced turnover based on income generated per worker. A standard vat dereg application was submitted. We completed the application, stating in the box ( that asks for why you believe turnover will be below the threshold in the next 12 months ) the precise reason given above, and the application was accepted without any further question.

If you can demonstrate to HMRC a reason as to why future turnover is going to be Below the threshold, they will generally go ahead and deregister.

Your accountant doesn’t appear to know the rules.

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Replying to Manchester_man:
By Red Leader
17th Jan 2020 17:42

Yes, I recently de-registered a client who had gone massively over the threshold. It was a one off big sale, explained this, de-reg successful. Client just ended up registered for a few months.

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