VAT threshold and small businesses

Didn't find your answer?

Does anyone else feel like you're failing your small business clients as you watch more and more go under after hitting the VAT threshold? I try to prepare them, ensure everything claimed is claimed, ensure they're on the best scheme, budgeting etc. What sort of list of help do you provide to help this transition to ensure they remain profitable? It's destroying all of the limited joy I get from my job nowadays.

Replies (19)

Please login or register to join the discussion.

avatar
By JB101
24th Nov 2023 11:19

No. Never seen that scenario.

Thanks (1)
avatar
By FactChecker
24th Nov 2023 12:17

Albeit it in a different specific scenario, Jason made some excellent points in another thread yesterday - https://www.accountingweb.co.uk/any-answers/re-organising-to-avoiding-cr... :
if you "need a VAT registration and if you add VAT .. that feels like prices go up, but you can also reduce your price as can now reclaim VAT on overheads, probably not enough to cancel out adding VAT at 20% but more likely an increase of 10%-15% which isn't quite as drastic as everything going up 20% ... it's not all doom unless you only focus solely on VAT and not the wider business, market, clientele and other taxes"

Thanks (1)
By williams lester accountants
24th Nov 2023 12:36

Never happened to us!

Thanks (1)
avatar
By FactChecker
24th Nov 2023 13:06

Albeit it in a different specific scenario, Jason made some excellent points in another thread yesterday:

if you "need a VAT registration and if you add VAT .. that feels like prices go up, but you can also reduce your price as can now reclaim VAT on overheads, probably not enough to cancel out adding VAT at 20% but more likely an increase of 10%-15% which isn't quite as drastic as everything going up 20% ... it's not all doom unless you only focus solely on VAT and not the wider business, market, clientele and other taxes"

Thanks (6)
Stepurhan
By stepurhan
24th Nov 2023 13:23

If VAT registration is really the death-knell for a particular business, then you are giving the wrong advice. The advice you should be giving them is how to legitimately keep below the threshold.

Close a few days a week or for part of the year. Don't take on new pieces of work. Basically keep turnover down to avoid the need to register.

That said, the chancellor should really have increased the threshold in his autumn statement. Simply inflationary rises push more people towards it.

Thanks (8)
Replying to stepurhan:
Danny Kent
By Viciuno
24th Nov 2023 15:27

Really needs to go down - IMHO it's already far too high.

Get rid of the glass ceiling you are talking about. If people were VAT registered much earlier it wouldn't be such a worry.

Then nearly every business would be VAT registered which is how it should be. Puts everyone on the same playing field.

VAT registration needn't be difficult or burdensome for the vast majority of traders, especially in this day and age where everything can be done with free/very cheap bookkeeping packages.

Thanks (6)
Replying to Viciuno:
Stepurhan
By stepurhan
24th Nov 2023 15:39

Viciuno wrote:

Get rid of the glass ceiling you are talking about. If people were VAT registered much earlier it wouldn't be such a worry.

Unless you make everyone registered, VAT registration will be a worry for any business with mostly private customers. It's a cliff edge for those businesses, whatever level it is set at.
Quote:

Then nearly every business would be VAT registered which is how it should be. Puts everyone on the same playing field.

Which is how it should be because? Unless, "Puts everyone on the same playing field" is your entire argument.
Quote:

VAT registration needn't be difficult or burdensome for the vast majority of traders, especially in this day and age where everything can be done with free/very cheap bookkeeping packages.

This is exactly the line that keeps being rolled out in favour of MTD. It is no more true here than it is there. Bookkeeping software is not a magic wand and VAT has some of the most complex rules imaginable in tax. Trust me when I say the "vast majority" of small traders would make a complete mess of VAT and find it an onerous burden to deal with the administration.
Thanks (7)
Replying to stepurhan:
Danny Kent
By Viciuno
24th Nov 2023 16:10

Honestly having every business VAT registered would be my preference. Reverse charge for all B2B transactions would be my second decree.

Having everyone on the same playing field is basically what my argument boils down to. Your current suggestion of turning down work, or closing for a few days is in nobody's interest. Stops businesses growing, employing more staff, making less money, makes our highstreets/towns ghost towns. (I do agree with your suggestions in the current climate though).

Madness that in a competitive environment (and by that I mean lots of smaller traders who are not VAT registered) going from 84,999 turnover to 85,000 immediately reduces business profits by c£14k - ofc I know there may be input VAT, but not always especially if they deal with other smaller traders. Turnover at this level is when a business is already successful and could be on the verge of really expanding.

I can count on one hand the number of people who struggle with VAT. Most people make a song and dance about it, but it's not hard usually. It's the thinking about it that is the issue.

Do agree that in some cases it's a minefield though, and it needs sweeping reforms to simplify it.

Equally we heard people doom and gloom about VAT MTD and how it would break everything. It works, and it works well now it's up and running.

VAT isn't a cost of business, it's a cost for a consumer. Yes the admin side of it is irksome, but it needn't be expensive or difficult. The ones that we have that make it difficult are the ones trying to do it on the cheap, via random software packages that don't do thing properly.

Thanks (4)
Replying to Viciuno:
RLI
By lionofludesch
24th Nov 2023 17:29

Viciuno wrote:

VAT isn't a cost of business, it's a cost for a consumer.

It's a tax on retailers.

Consumers just look at the bottom line price.

Thanks (3)
Replying to Viciuno:
avatar
By Open all hours
25th Nov 2023 08:47

It’s an admin cost to business and left to themselves most clients would make a pigs ear of VAT. Problems multiply with software which seems to have a high degree of ridiculousness built into it, Quickbooks suggesting that a cheque payment is for ‘bank charges’ being just one.

Thanks (2)
Replying to Viciuno:
avatar
By sodge2000
02nd Dec 2023 13:24

VAT MTD is a cost to my business. A charge of £9.50 for every VAT return I process.
So it is not without cost

Thanks (1)
avatar
By jonharris999
24th Nov 2023 14:36

No. Can you describe an example of a business this has actually happened to?

If a business really started to lose x% of its sales after registration - and I have never seen this even start to happen, myself - why wouldn't it simply de-register and turn away y customers, to go back underneath the threshold?

Thanks (0)
VAT
By Jason Croke
24th Nov 2023 15:39

A little hyperbole I think here.

Businesses either stay under the threshold or they set out to blast past the threshold, doubling down on what they do well.

I don't think I've ever had a client who went over threshold and then collapsed a few weeks later, as others have posted, weigh up the business and either close down for a day a week/change the offering slightly so bring your own booze to the restaurant/corkage suddenly makes a lot more sense for much less effort, or else just register for VAT, prices get tweaked, lose a few customers maybe, open 7 days a week and get the punters in like pubs do midweek such as 2-4-1 cocktails or steak night, etc.

As in my other post on another thread, VAT is not necessarily inevitable or if it is, then accept your fate and look at the wider business model, market, competition and adjust accordingly.

Thanks (8)
avatar
By mumpin
24th Nov 2023 20:31

Agree with OP specifically in regard to retail where gross margin is maybe 30% or less.
First vat return gets vat back on stock in hand so happy days.
Thereafter the reality hits home.
Its hard to go from £85k to £120k to maintain drawings level.
FRS sometimes helps.
Client suspects competitors are all non-registered liars...

Thanks (0)
Avatar
By I'msorryIhaven'taclue
24th Nov 2023 21:32

I'm not fond of analogies, but in a comparable world I've occasionally come across growing businesses hitting a ceiling whereby they've outgrown their tried and trusted close-family-and-associates' reliance on a zulch stock control system; but at the same time aren't quite big enough to employ a workable stock-control.

No-man's land! Teetering on the cusp - one toe-in-the-water, the other out! Notice the parallels with the VAT threshold issue?

My input to any client who cared to take notice would be to elect, one way or another, to jump either side of the fence. But not to sit on it, in no-man's land.

Thanks (3)
avatar
By adam.arca
25th Nov 2023 08:15

I kind of agree with everyone here, which is a bit weird.

For me, the OP has a valid point and I’ve also seen *some* businesses struggle to cope with the negative impact of VAT registration on profitability. The emphasis has to be on *some*, though.

I agree with most everyone else that VAT registration has to be seen as a challenge and not a problem: fiddling around trying to stay under isn’t a long term strategy, not least in these days of fiscal drag.

But most of all I agree with Vicunio: the registration threshold needs to come down dramatically. I’d set it at a generous-ish level for labour only self employed with a few expenses and dealing with the general public which would allow them a living but no genuine business would be able to make sufficient profit at. Where I am, that feels like £30k-ish, maybe £40k-ish, but allowing for more affluent areas of the country say £50k.

Thanks (2)
Replying to adam.arca:
avatar
By FactChecker
25th Nov 2023 11:28

Of course the main problems with this otherwise logical proposal all lie in the world of practicalities ... starting with management of the transition (or suddenly enforced registration really could resemble the lemmings' cliff-face).

Plus the lack of political willpower in the face of an uncomprehending populace.
I've met people (members of the general public) who will actively select a supplier on the basis of charges being 'no VAT' ... if they can't reclaim it then they don't care about whether it *should* have been charged (let alone the niceties of the system) - it's just a 'saving' innit!
This is likely to be more of a factor with a lower registration level as you're more visibly dealing (typically) with a sole trader individual, so feel jointly invested in the project/work item.

Thanks (1)
avatar
By seonaid anderson
01st Dec 2023 12:02

Helen, I am totally with you. I have a couple of clients dancing around the VAT limit. It is soul destroying and not sustainable for them to keep cutting hours etc to stay below but if they go over the Vat limit they can't pass the extra on to customers as well as the other increases in overheads. Vat recovery ( other than first quarter) would be minimal and minumum wage rises hurting already...
I don't mind what the VAT limit is - its the cliff edge that's the problem a few £'s over can cost £000's.

Thanks (3)
Morph
By kevinringer
01st Dec 2023 15:03

The VAT registration threshold is a cliff edge. Clients that supply to VAT registered businesses will have voluntarily registered from the outset, so the £85k doesn’t affect them. But clients that supply to consumers have to weigh up their options and though they can recover VAT on inputs when registered, they can’t pass on all the output VAT to their customers so some of the VAT becomes an expense. Some are in a position where they can grow large enough so that the additional sales offset the VAT cost, but most sole traders can’t physically do that. Some can switch their customer base to businesses, but most only know what they do, so have to carry the cost.

The current VAT threshold of £85k came into effect 1 April 2017. If the VAT registration threshold had been increased with inflation it would be about £110k today. At the time, the Government used to increase it annually and made a point that it was the highest that was permitted by the EU, and implied that the EU were holding the Government back from increasing it further. It is ironic that it has been frozen since Brexit. I suspect the threshold was frozen at the time because it was also the MTD VAT threshold until 2022. Today, I suspect the Government wishes to keep it frozen for the same reasons as the Personal Allowance and tax bands; tax by stealth.

Thanks (1)