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VAT registration threshold ping pong

VAT registration threshold ping pong

I have a client who may breach the VAT threshold, but cannot add VAT to their prices. Their turnover will max out at about £90k

As soon as they register for VAT their turnover will be under the dereg threshold.

If they then deregister, their turnover will be back over again...

It's not a temporary blip, but is there guidance for a business playing this kind of ping pong? They would rather not be registered.

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20th Oct 2015 23:31

Holiday
For an extra week or two.

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21st Oct 2015 08:39

Registration Threshold

Strictly, if his turnover exceeds the threshold, he has to notify HMRC. At the same time apply for exemption from registration on the basis that his turnover will then drop below the threshold. (There is a penalty for failing to notify this.)

But, he will need to take stronger action in the future to prevent this recurring.

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21st Oct 2015 08:54

In fairness, you're looking at turnover

potentially breaching the registration limits by almost 10%. I doubt whether HMRC will be able to offer registration exemption at those levels but, of course, it does come back to the detail, which only you are aware of.

You mention that adding Vat to their prices is not an option. Whilst I fully appreciate what you say, shouldn't the owner(s) be looking at various alternatives to their present business model, whereby the associated costs of Vat registration are integrated into the business?

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21st Oct 2015 12:11

VAT thresholds

Give us a few examples of what those "various alternatives" may be especially if the poster's client is perhaps a restaurant.   

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21st Oct 2015 10:29

ping pong

According to the booklet 700/11(section 3) about cancelling your registration, HMRC will not allow you to deregister in the circumstances you outline. (This assumes your client won't cut his prices if he deregisters, since he wasn't increasing them when he first registered) 

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By birdman
21st Oct 2015 13:02

Maybe it's just my faulty logic..

But if they are not changing their prices on registration, what will cause turnover to dip?

Their pricing should be based upon a VAT-registered business, and any extra profit made pre-registration is a bonus. If their pricing structure doesn't make enough profit when registered, it begs the question "is this business viable?".

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21st Oct 2015 14:12

Dipping turnover

birdman wrote:
But if they are not changing their prices on registration, what will cause turnover to dip?
If they do the same level of sales at the same prices their unregistered turnover of £90,000 becomes a registered turnover of £75,000 + £15,000 VAT.

Would flat rate soften the blow enough to keep the business viable? For that matter, what is the reason that they cannot add VAT to their prices? Is there some scope for splitting the increase without risk of losing significant business?

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21st Oct 2015 14:16

Perfect logic - profit sensitive client

birdman wrote:

But if they are not changing their prices on registration, what will cause turnover to dip?

Exactly, his falling profitability is the issue he should be addressing not VAT registration... 

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21st Oct 2015 13:57

Why do they not just lower their prices by 10%, rather than pay 20% of their turnover to HMRC? Or did this just suddenly happen?

I can confirm that Birdman's faulty logic is faulty logic.

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21st Oct 2015 14:09

dipping

It doesn't really dip, Birdman. I think the OP had in mind that once he registered, with turnover at say £90k, he would subsequently look at his net of VAT ie £75K net, and decide he could now de-register.  Not a real drop. As I said, HMRC won't allow him to de-register. This is the cliff-edge in action, and tough though it might seem, Portia's suggestion of cutting prices, or shutting for a couple of weeks, makes perfect sense.  

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By birdman
21st Oct 2015 14:27

Maybe it's not faulty logic...

as such - as if it is KNOWN that the income will not change following deregistration, how can you deregister on the basis of being below the limit for the next 12 months? Pingpong says they won't be allowed to deregister, I'd agree as they don't fit the criteria of increasing prices to include VAT on reg/reducing to remove on dereg, so the OP's "problem" doesn't really exist.

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By Ruddles
21st Oct 2015 14:35

Are folks missing the point here?

If the trader is unable to increase his prices then the turnover becomes VAT-inclusive so, all things being equal, value of taxable supplies will fall to below the deregistration limit.

As indicated in the third response above, the excess may be too great in this case but my experience is that where threshold has only just been breached, HMRC will defer registration for a year and ask the trader to monitor turnover carefully.

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By Monsoon
27th Oct 2015 12:47

Thanks for all the answers. I didn't get any email notifications, how odd.

The client is a retailer of high value items. The market will only pay so much and they already charge the max they can. They can only physically produce a certain number of items per year. There is no problem with their business model, these are just the facts for their industry. It's quite niche and giving more info could identify them so that's about all I can say.

birdman, I still don't get your logic. I can apply to dereg because a £90k turnover is becoming £75k on registration, and then we play ping pong, so it is a problem

Ruddles- I like to think HMRC would apply your logic. Thank you. 

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27th Oct 2015 13:37

I now understand birdman's point.

The basis of deregistering is that turnover will be below £80,000. If there is no intention to lower prices following deregistration, then the act of deregistration means that the conditions of deregistration will not then be satisfied, such that deregistration is not then possible.

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By Monsoon
27th Oct 2015 13:45

Me too

Portia Nina Levin wrote:

I now understand birdman's point.

The basis of deregistering is that turnover will be below £80,000. If there is no intention to lower prices following deregistration, then the act of deregistration means that the conditions of deregistration will not then be satisfied, such that deregistration is not then possible.

Yes, I too now understand that. As you say, it's the cliff edge of VAT registration.

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By Ruddles
27th Oct 2015 13:59

I understand Birdman's point

But not convinced that it applies here.

The concept of reducing prices, as a result of no longer having to charge VAT, presumes that the trader is already charging VAT (which would be reflected in an increase in prices on registration).

Secondly, and more relevant, the guidance referred to deals with deregistration. You cannot deregister if you are not registered. Which brings me back to real-life experience - HMRC may be prepared to defer registration in such circumstances.

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27th Oct 2015 14:15

You mean that HMRC may be prepared to defer registration where, without VAT registration, the trade will consistently be 10% above the VAT registration threshold.

HMRC do not have that much discretion. The law says that a person that exceeds the £82,000 threshold under the historic test does not have to register if their turnover for the coming year will be below £80,000. Those are the parameters of their discretion, in this regard.

Their discretion extends further where zero-rated supplies predominate.

http://www.hmrc.gov.uk/manuals/vatregmanual/VATREG19050.htm and http://www.hmrc.gov.uk/manuals/vatregmanual/VATREG20050.htm refer.

Are you suggesting that you have had experience of HMRC accepting non-registration outside the confines of their own guidance?

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By Ruddles
27th Oct 2015 15:57

Experience

Portia Nina Levin wrote:

You mean that HMRC may be prepared to defer registration where, without VAT registration, the trade will consistently be 10% above the VAT registration threshold.

HMRC do not have that much discretion. The law says that a person that exceeds the £82,000 threshold under the historic test does not have to register if their turnover for the coming year will be below £80,000. Those are the parameters of their discretion, in this regard.

Their discretion extends further where zero-rated supplies predominate.

http://www.hmrc.gov.uk/manuals/vatregmanual/VATREG19050.htm and http://www.hmrc.gov.uk/manuals/vatregmanual/VATREG20050.htm refer.

Are you suggesting that you have had experience of HMRC accepting non-registration outside the confines of their own guidance?

Yes - and no. I have experience of HMRC accepting non-registration in circumstances very similar to the OP's. The excess was not 10%, though, which is why there is perhaps greater uncertainty in this case.

What the law actually says is that a person may not be required to register if the Commissioners are satisfied that the value of taxable supplies in the next 12 months will be below the deregistration threshold. I accept that we have a chicken-and-egg situation here, because until the trader is registered the value of taxable supplies will not drop. But HMRC do appear to have accepted that registration would cause the condition to be met, and exercised that 'discretion'. Whether that discretion was exercised in error I don't know, nor do I care - the taxpayer certainly wasn't going to challenge it.

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By Old Greying Accountant
27th Oct 2015 14:35

Had one in this situation ...

... a B&B, prices are fixed by the market, you have to absorb the VAT.

It is a nightmare, they could offer specials and such like to keep turnover down, but when the business is seasonal it is hard to know what annual t/o will be.

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