- Rachel Allen
- 15th July 2020
Do You Need To Think About VAT Now?
Is VAT something that has not yet crossed your business path? Is it something that you are currently dismissing because you are nowhere near the VAT threshold and you’ve got enough going on right now?
Well, there are some situations in which you would be very wise to be thinking about VAT right now.
• You are selling almost exclusively to VAT registered businesses
In this case get yourself registered! You can reclaim VAT on purchases that you have to make for your business and this can reduce your costs quite significantly.
You will need to consider the extra time and maybe cost of getting a good accounting system such as Xero (it needs to comply with making tax digital (MTD) as all new VAT claims need to be done on-line now) or using an accountant to do the return for you; but it doesn’t take a lot of input VAT to offset these costs and make it worth your while. It is also great practise for when you do need to be VAT registered.
• You are growing rapidly
If this is the case then you will reach £85,000 of turnover (the threshold at the time of writing) before you know it! And if you wait to reach there then you will be very un-prepared.
Trying to run an £85k turnover business AND learning all about VAT AND implementing a new accounting system AND start issuing VAT invoices AND saving the VAT ready to pay over AND preparing for MTD all at the same time is a big ask.
It is worth getting started on some of these early so that when you get there you can register and implement smoothly.
• You are approaching the VAT threshold
In this case it is vital that you arm yourself with information so that you are ready to go when you need to. In particular, ensure that you are tracking your year to date income. This means that the end of every month you add up your turnover for the previous 12 months. This has nothing to do with your tax years. You will have to register the month after your rolling 12-month turnover goes over the threshold. You will not be able to wait until you have done your year-end accounts.
If you go over the threshold and do not register or apply for a deferral (available only in a few exceptional cases) then you could be liable to a large amount of back tax (as HMRC could treat you as being registered from the date you go over and then calculate what you owe them as a result!)
• You actively do not want to go over the threshold!
For some people growing large is not a goal of theirs and they are very happy ticking along under the VAT threshold. In this case it is still important to understand VAT so that you know where the threshold lies and are monitoring it if you are getting close.
If you are getting close, and you really do not want to register, then is the time to review the profitability of types of work and maybe dropping some of the less profitable or more time heavy bits to keep you below the threshold.
• You are in an industry where being registered matters!
This is becoming less common these days as so many people are working as solopreneurs supplying their services rather than requiring a corporate umbrella from which to do so, and so being reputable but under the VAT threshold is more acceptable.
But there are still some industries where they may consider you too small if you are not VAT registered. To be fair, these are often the VAT registered businesses themselves so there is a good argument to register anyway if you supply mostly to these people (see point 1) but in some cases it is worth registering in order to get the kudos this can give in some eyes. Again you would weigh up the cost of registering with the increased work that you can get once registered.
• To get it out of the way
I would argue against registering too soon (unless point 1 applies) as you will have additional work to do and unless you are able to increase your prices you will lose some of your income to VAT.
However, if you are approaching the threshold and you are about to introduce a decent new income stream or have a significant price increase planned then it is worth considering registering for VAT at the same time.
The reason for this is that you won’t notice the ‘reduction’ so much if you are having an offsetting increase at the same time. It is all in the mind here, but so long as registering is right for you, then timing it well and getting it out of the way so that you can concentrate on further increasing your turnover (either through price or volume) could be a good move for you.
• To get into the habit of saving
In this case I am not necessarily advocating registering early, but instead getting into the practise of saving to pay your VAT.
Anyone who has read the book ‘profit first’ or who practises a similar method of carving up your turnover on receipt to allow for profit, remuneration, tax and expenses will be used to the idea of saving a proportion of their income for tax.
The way that this works is that you run several concurrent bank accounts (most commonly turnover, profit, remuneration, tax and expenses) and the income coming into the turnover account is redistributed immediately to the other accounts on a set proportion to cover for these expenses.
It is wise to consider, as you start to grow, what your tax saving would need to be if you were VAT registered, and getting into the habit of saving it anyway, even though you are not VAT registered.
This achieves two things. Firstly, you get used to paying yourself a remuneration based on the nett income as if you were VAT registered and secondly, you build up a tax buffer for when you do register and maybe have a few months or a year in the zone where you are taking a hit from being VAT registered.
If you are growing very slowly then you can decide to take some of this tax figure out as a bonus for yourself but if you are growing fast you will appreciate taking the time to set this up now. It will make going over the threshold much easier and saving the VAT money rather than having to find it each quarter is a very good habit to get into if you can.
I hope that these have been helpful. If you would like to know more about the above or VAT in general then don’t hesitate to get in touch at www.facebook.com/rachelallencoaching or firstname.lastname@example.org