VAT The tax which could cripple your business

When it comes to any tax liability, forewarned means forearmed. Photo by Tomas Yates on Unsplash

VAT The tax which could cripple your business

At £85,000, the VAT (Value Added Tax) threshold in the UK is relatively low.  When it comes to any tax liability, forewarned means forearmed, so for a business owner some early preparation and planning will help to avoid any nasty surprises resulting from business growth or success.  The threshold is calculated on turnover rather than profit so it can easily be reached by activities such as managing third party supplier invoices. 

Here are some early interventions business owners can carry out to avoid being caught out by unexpected tax bills.

  • Projection- working with an accountant straight away to project growth.  A business only needs a monthly turnover of just over £7,000 to hit the VAT threshold.  This is especially important if a business has employees; wages cannot be offset against VAT!  
  • Businesses like hairdressers are particularly susceptible to hitting this threshold early and when they do, they cannot simply increase their prices by 20% to cover VAT payments or customers will vote with their feet and go elsewhere.
  • In the case of a business’s year one turnover reaching £120k, but the business is not VAT registered, it will be liable not alone for the VAT bill, but will also be subject to penalties. 
  • HMRC operates flat rate VAT schemes, which are based on industrial averages.  While this avoids the administration element of a VAT return, it could work out costing a business more.   VAT is managed on a case by case basis and no two cases are the same, so this is another good reason to engage an accountant early on!

Conversely, it is possible to register a business for VAT even if its turnover is below the VAT threshold.  Being VAT registered without having reached the £85,000 threshold can afford businesses several advantages;

  • Perception is everything, so a small business can bid for contracts with larger organisations who require their suppliers to be VAT registered.  It also makes a business appear bigger than it is! 
  • If a business imports goods from the EU, having a company VAT registration number means that they will not be liable to pay VAT on these goods.
  • Smaller businesses with a VAT registration number can receive tax relief on purchases, e.g. buying a large piece of catering equipment.
  • For a business renting premises which charge VAT, such as in a business park, VAT registered businesses can again reclaim the VAT!

Some thoughts to leave business owners with:

  • Engage an accountant early, if only for peace of mind.
  • Educate yourself!  As an accountant, I have heard some eye-watering stories from clients who received costly ‘advice’ from friends and family, including ‘you don’t have to register for VAT in first year of business’.  This resulted in a huge bill and a late penalty fee from HMRC for the same amount as the VAT bill.  Ouch!
  • Consider the end user in your business and pricing models; an individual consumer will not be VAT registered so will be unable to reclaim VAT.  If your prices increase due to hitting the VAT threshold, customers may go elsewhere.  This instance regularly occurs for business like painters, decorators and landscape gardeners. 
  • As the introduction states, forewarned is forearmed and seeking advice early can help businesses manage the tax which could cripple their business.

To see how NBAS* could help you and your business learn about VAT registration contact