VAT - **** 'em

[Steve H]

r3g said:

A friend of mine with an MOT and light repairs and servicing garage went VAT just over a year ago and reckoned that his long time regular customers would keep coming because of his excellent reputation. He has a diary of them all and his wife contacts them when the car is due but a significant number have not been seen again so are going elsewhere, presumably to one of several other garages in the vicinity who are non-VAT. He's still doing alright from the MOT side of the business, but the servicing and light repair work has seen a sginificant reduction. It used to be roughly 50/50 split for MOTs and servicing/repairs but it's now more like 80/20. Once those loyal customers go elsewhere, you've lost them for good.

Your friend needs to cultivate better customers.

It’s very hard to run a profitable workshop and stay below the vat threshold (legitimately at least) so most that do stay below it are charging the lowest hourly rates (irrespective of vat) which in turn attracts the customers who are most attracted to low prices.

This isn’t to say these guys are not doing a good job, many of them will be every bit as good as the garage on the next street that charges twice as much and has plenty of customers who do not mind paying more.

• so you know I am not just guessing at this, I do diagnostic work for the motor trade with everyone from main dealers to one man bands as customers.
• also worth noting that as an MoT station your friends situation is a little unusual as not all of his output will attract vat, I assume (but may be wrong) that this means his MoT turnover also does not contribute towards hitting the threshold.

But on the whole I would think that pretty much any full time business that either sells any significant amount of product (not just labour) or runs the cost of premises must be at risk of hitting the threshold if they want to make a decent living.

[dxg]

Jordie Barretts sock said:

robinh73 said:

I run a tree surgery business and have this year just gone over the VAT threshold. I have a mix of personal and business customers and while the business ones can claim the vat back, the personal ones cannot do so. This is going to cause issues as I will be 20% more expensive in an already very competitive sector. I am just hoping that it won't be as much of an issue as I fear it may be.

It will be.

If I were you (and I'm waaaay over the VAT threshold) I'd be doing all I could to get back under it. You say business can claim it back, yes they can, but they still have to pay it out in the first place. There really isn't an upside to being an unpaid tax collector.

My electrician was in the same situation.

He cleaved his business into two distinct entities and "gave" one to his son.

[MattsCar]

Jordie Barretts sock said:

robinh73 said:

I run a tree surgery business and have this year just gone over the VAT threshold. I have a mix of personal and business customers and while the business ones can claim the vat back, the personal ones cannot do so. This is going to cause issues as I will be 20% more expensive in an already very competitive sector. I am just hoping that it won't be as much of an issue as I fear it may be.

It will be.

If I were you (and I'm waaaay over the VAT threshold) I'd be doing all I could to get back under it. You say business can claim it back, yes they can, but they still have to pay it out in the first place. There really isn't an upside to being an unpaid tax collector.

Have a look at the Flat Rate Scheme Robin, as this is a lot easier to account for and beneficial to businesses that don't have large amounts of input VAT to claim back.

But yes, do your calculations, you might find that doing a few less jobs a week is beneficial, in comparison to doing a few more jobs a week to make up for any profit shortfalls, due to being on VAT.

[Dynion Araf Uchaf]

MattsCar said:

It is a huge barrier to growth for small businesses.

I have recently gone over the VAT threshold, after spending 2 years, deliberately underneath it. This included calculating what i was allowed to sell on a daily basis, based on what i had sold on that day the previous year and shutting shop, turning customers away when it looked like i was going over that limit.

With all things considered... this is where I am at...To equal the profit, with a turnover of £85,000, not VAT registered, I will have to Turnover £110,000 a year when VAT registered.

It feels like a massive gamble, it has stressed me out over the past few months due to all the extra paperwork and the complexity of Making Tax Digital, but on the plus side, business is looking good and it feels nice to be able to actually sell whatever I want.

However, as soon as I get an inkling that I will soon be under, then I will be straight on to HMRC to deregister and I will go back to enjoying an hour or two work a day and plenty of holidays.

ETA- Also this idea that everything will be fine and you just charge more because you are now on VAT is a trope given by people who have no idea how customers work....If the customer is not VAT registered, then the increase in price will result in fewer sales.

Edited by MattsCar on Wednesday 31st January 22:16

erm is there a reason why you don't just put your prices up, to reduce demand to the level you want. Less work, more profit, not VAT ,no stress?

[Leptons]

My eldest goes to Dance lessons one night a week. All us parents have just had to stomach a 20% increase because they’ve just gone VAT registered. Pisses me off, it’s a kids extra curricular activity ffs!

[r3g]

Steve H said:

Your friend needs to cultivate better customers.

It’s very hard to run a profitable workshop and stay below the vat threshold (legitimately at least) so most that do stay below it are charging the lowest hourly rates (irrespective of vat) which in turn attracts the customers who are most attracted to low prices.

This isn’t to say these guys are not doing a good job, many of them will be every bit as good as the garage on the next street that charges twice as much and has plenty of customers who do not mind paying more.

• so you know I am not just guessing at this, I do diagnostic work for the motor trade with everyone from main dealers to one man bands as customers.
• also worth noting that as an MoT station your friends situation is a little unusual as not all of his output will attract vat, I assume (but may be wrong) that this means his MoT turnover also does not contribute towards hitting the threshold.

But on the whole I would think that pretty much any full time business that either sells any significant amount of product (not just labour) or runs the cost of premises must be at risk of hitting the threshold if they want to make a decent living.

You are probably correct re the first line, but it was only around 6 months ago that he put his MOTs and labour rate up a fiver to £50 which even though it's still a reasonable price compared to some other garages, had some customers grumbling, especially in light of the MOT places not far away that do them for £35 (with the wholly predictable failures on silly items to generate profit from the not needed repairs).

There is no VAT on MOTs so that's a moot point.

I personally think he's made a mistake by going VAT as he can tick along just fine doing MOTs (70% of his MOTs are from local garages) which are a 'known quantity' in terms of time and work required. He's had several instances where he's taken on repair jobs and a nut has rounded or seized meaning that the car is stuck on the ramp, preventing the next job/MOT from happening and a pissed off customer.

He's basically increased his hassle factor significantly for little gain, whilst making himself unattractive to customers in his (deprived) area and has lost a number of long-term customers already. It's easy to say "cultivate better customers" but customers will generally stick with the same garage for life unless they have a problem with the work, or there's a massive increase in the cost (eg. VAT) or the owner decides to retire, forcing them to find somewhere else.

I'd say a big part of the reason why so many businesses are being "forced" into VAT is because of the increased labour and parts costs meaning you have to do less to stay under the threshold. They should have increased the threshold in-line with inflation then this wouldn't be as much of a problem.

[snuffy]

MattsCar said:

Have a look at the Flat Rate Scheme Robin, as this is a lot easier to account for and beneficial to businesses that don't have large amounts of input VAT to claim back.

But yes, do your calculations, you might find that doing a few less jobs a week is beneficial, in comparison to doing a few more jobs a week to make up for any profit shortfalls, due to being on VAT.

One thing that caught me out when I was using flat VAT was I applied the percentage to my ex-VAT figures.

For example, say your flat rate is 11%.

You sell £100,000 of whatever, so I worked out my VAT liability was £11k (i.e. 11% of £100,000). Wrong - it's 11% of (£100,000 + 20%), i.e. £13,200.

So I ended up underpaying VAT for about a year until my accountant spotted my error.

[Pistom]

£85K is a ridiculously low threshold these days but it is what it is.

The smallest of business can hit that with ease and if the customer is not VAT registered, it hits hard in the pocket.

A local heating technician just about avoids it by getting clients to buy materials directly which he then installs.

[MattsCar]

Dynion Araf Uchaf said:

erm is there a reason why you don't just put your prices up, to reduce demand to the level you want. Less work, more profit, not VAT ,no stress?

Yes, to give some context I am an online seller.

I had put my prices up to reduce sales up over the past 2 years to keep under the threshold.

However, I was basically doing an hour's work a day and getting slightly bored as I was running a business with no scope for growth and it got to the point where I was closing every few weeks, which didn't look good and I was turning away customers.

I took the decision to go full time, i.e VAT registered in the last few weeks, only because it became glaringly obvious that going on to VAT would prove beneficial, in terms of profit.

It so far has.

Previously, I was basically limited to £230 ish a day in sales. Now, with advertising, pushing sales etc, £500 a day is not out of the norm.

I guess my situation is different compared to someone who is running a labour intensive business as the extra turnover does not necessarily mean a lot more work.

[zedstar]

Like a lot of things with tax related items the government just need to increase it in line with inflation and then there wouldn't be so much of an issue. The 85k figure should be at least 100k now, along with the personal allowance and basic rate limits being increased too.

It's a proper barrier to growth. We had some building work this year and the guy who installed the underfloor heating was a great tech, when he came round to check it was all ok I asked whether he'd like to do some more work for me here and there. His response was, 'no, i've got some regular customers and thats that really'. I was a bit offended/surprised so I pushed a bit and then he said something like, 'I liked doing this job, the builder speaks nicely of you so it would be good to have another regular but i'm not prepared to go VAT registered, cos If do I need another day to work each week before I'm back to the same income'.

He was right, and it's beyond the point that the limit needs to be reconsidered.

[Eric Mc]

Britain has quite a high VAT Registration threshold. Most countries are much lower. The idea being that it's a level playing field for all but the tiniest operation.

A think tank suggested a few years ago that the VAT Registration threshold be reduced dramatically - to around £40,000. The government at the time said they would do so at the earliest opportunity - presumably the next Budget. It never happened.

Instead, Sunak froze it so they are getting there without having to do anything.

[MattsCar]

Eric Mc said:

Britain has quite a high VAT Registration threshold. Most countries are much lower. The idea being that it's a level playing field for all but the tiniest operation.

A think tank suggested a few years ago that the VAT Registration threshold be reduced dramatically - to around £40,000. The government at the time said they would do so at the earliest opportunity - presumably the next Budget. It never happened.

Instead, Sunak froze it so they are getting there without having to do anything.

Indeed, it is the highest in Europe.

I think part of the reason why people avoid it is the resultant "big hit" you get once you are on it. If it were at a lower level, it would be less of a hit and just a reality of business.

I am not an economist, but lowering the threshold would create a lot of angry people, but I am pretty sure the government would get more in their coffers from it.

[snuffy]

My business is 100% B2B.

a) I add on VAT, and submit my invoice.

b) Customer gives me the VAT.

c) I give that VAT to HMRC

d) Customer claims back that VAT from HMRC

e) HMRC gives the VAT I gave to them, from my customer, back to my customer.

How brilliant is that ?

[PF62]

Eric Mc said:

Britain has quite a high VAT Registration threshold. Most countries are much lower. The idea being that it's a level playing field for all but the tiniest operation.

Exactly.

Most of Europe has thresholds around 20,000 with some like Spain as low as zero.

That way VAT registered businesses are not competing with unregistered businesses as everyone is, plus the fiscal authority in that country doesn't have to do any difficult checks to prove someone should be registered when they are not as nobody can survive on 20,000 or less.

Now sure the added VAT might depress customer demand, but at least everyone is on a level playing field for that customer demand.

But as it is in the UK lots of small businesses simply take their foot off the accelerator as they are heading towards £85k or get themselves involved in tax evasion - which when it comes to VAT registration is a *very* bad idea as there is no time limit for HMRC to backdate a VAT registration and demand the VAT that should have been paid - they can go all the way back to 1973.

[robinh73]

MattsCar said:

Jordie Barretts sock said:

robinh73 said:

I run a tree surgery business and have this year just gone over the VAT threshold. I have a mix of personal and business customers and while the business ones can claim the vat back, the personal ones cannot do so. This is going to cause issues as I will be 20% more expensive in an already very competitive sector. I am just hoping that it won't be as much of an issue as I fear it may be.

It will be.

If I were you (and I'm waaaay over the VAT threshold) I'd be doing all I could to get back under it. You say business can claim it back, yes they can, but they still have to pay it out in the first place. There really isn't an upside to being an unpaid tax collector.

Have a look at the Flat Rate Scheme Robin, as this is a lot easier to account for and beneficial to businesses that don't have large amounts of input VAT to claim back.

But yes, do your calculations, you might find that doing a few less jobs a week is beneficial, in comparison to doing a few more jobs a week to make up for any profit shortfalls, due to being on VAT.

I will indeed look into the Flat Rate Scheme. The idea of doing a few less jobs isn't bad at all, but my only worry is that if I turn down work or tell an existing customer I can't do a job then I will probably lose that customer for good and I have to be honest and say that 99% of my customers are decent fortunately. All a bit of a conundrum!

[Tim Cognito]

Eric Mc said:

Britain has quite a high VAT Registration threshold. Most countries are much lower. The idea being that it's a level playing field for all but the tiniest operation.

A think tank suggested a few years ago that the VAT Registration threshold be reduced dramatically - to around £40,000. The government at the time said they would do so at the earliest opportunity - presumably the next Budget. It never happened.

Instead, Sunak froze it so they are getting there without having to do anything.

Getting there over time without the big fallout of cutting it must be the plan

2003: 56k
2013: 79k
2024: 85k

The fil tends to cut it fine staying under the threshold and normally ends up taking about 4 weeks holiday between Jan and April...

[Pistom]

I get the argument that it levels the playing field but in some sectors, the impact on prices for non VAT registered customers would be huge.

One of my businesses is a furnished holiday let where non of the customers can claim VAT back but many suppliers of holiday lets are under the threshold.

[bad company]

When we had some work done at our offices the electrician had all the materials invoiced direct to my company. We paid the invoice and legally reclaimed the VAT. He then charged separately for his labour, that’s how he kept under the threshold.

There must be other similar legal ruses?

[robdcfc]

Eric Mc said:

Britain has quite a high VAT Registration threshold. Most countries are much lower. The idea being that it's a level playing field for all but the tiniest operation.

A think tank suggested a few years ago that the VAT Registration threshold be reduced dramatically - to around £40,000. The government at the time said they would do so at the earliest opportunity - presumably the next Budget. It never happened.

Instead, Sunak froze it so they are getting there without having to do anything.

Ive always felt the threshold should be around 20k and VAT reduced to 12.5-15%, this would make a level field for pretty much all businesses as there are many that are juggling to stay under 85K and charge pence less than I do but make 15% plus more profit per job.

Its an aversion to paying into government rather than anything else for me.

[RicksAlfas]

snuffy said:

My business is 100% B2B.

a) I add on VAT, and submit my invoice.

b) Customer gives me the VAT.

c) I give that VAT to HMRC

d) Customer claims back that VAT from HMRC

e) HMRC gives the VAT I gave to them, from my customer, back to my customer.

How brilliant is that ?

When I print a book, all the raw materials have VAT on them, which I claim back.
When I sell the book to the end user it is zero VAT rated...