Question for VAT registered small businesses

[NameIsBryceQuinlan]

I own a small business that sells a service to the public, we have a few branches of the business, a fitness studio, retreats, activity in schools and businesses, a small shop etc we are about to register for VAT.

I think we qualify for flat rate which is 8.5% - my question is anyone who has been in this situation, we have high outgoings and this is really going to be a hit for us... Our prices are competitive locally and we don't feel we can pass these extra costs onto the public.

Is it simply a case we absorb it? I'm sure it is just asking in case I haven't thought of something! And does anyone find business advisors helpful?

You can stay in the standard scheme. Only switch if it gives you a cash flow advantage.

Sorry i don't understand what that means @HewasH20

If you deal with businesses , schools etc they will be expected to be charged vat on top of your fee, they will be able to claim it back. Not so easy with the public but you may need to put some of your prices up

Then you need a book keeper or an accountant before you get yourself in trouble with HMRC.

Exactly as Redwing says. If you don't understand which of the standard or FRS will be beneficial, you need advice from a professional with far more knowledge about your business than a bunch of random chartered accountants on MN who don't have any knowledge of it.

Please get yourself an accountant - I have a suspicion you think that the flat rate schedule means you charge that % of VAT.....if I'm wrong I really do apologise!

If you are dealing mainly with other commercial enterprises adding vat on will be irrelevant to them as they can claim your vat element back.

I.e previously you charged £10. They paid you £10 but because you aren't VAT registered they couldn't claim anything back from HMRC

If you are go VAT registered you'll charge £10 + VAT = £12. They'll pay you £12 and claim £2 back on their VAT return.

If you deal mainly with the public then obviously that doesn't apply.

Standard VAT is where you account for the VAT on the date on invoice regardless of whether payment has been made.

Cash accounting you account for the VAT on the date of payment. Irs designed to ease cash flow.

Speak to your Accountant for advice, certain business types, can be flat rate for VAT. With the flat rate scheme, you charge the customer the standard 20% vat and pay to HMRC, the amount you collect on their behalf, used to be 10% in the first year and 11% there after. You keep the rest. The percentage may have change now though. With flat rate you can’t reclaim vat on purchases. So swings and roundabouts. If you are over the threshold you need to register for vat.

Also just with the flat rate. That's not the VAT rate you charge to customers. You still charge 20%.

You then just pay your flat rate percentage to HMRC based on your gross sales instead of calculating the difference between sales and purchases.

I'm not in trouble with HMRC, I have an accountant, we are two months away from needing to register, I'm just looking to understand where we can examine our income and make changes in the new year. There's only so much we can hand on to customers otherwise we won't be competitive locally and we will lose loyal customers. Sadly the business/schools is a small part of the income so not much to recoup on our invoices.

I was just looking to understand from other small businesses who mainly sell to the public how they navigated this as it's a huge extra tax for us to pay

I have been vat registered with my other business but it was very simple as my invoices were to large corporations and I charged the vat on my invoice.

This business is more complicated, if we charge £500 for a retreat we can't suddenly add £50 on as this isn't fair to our customers.

I sell to charities, a mix of large VAT registered ones and small ones that aren't VAT registered. I was pretty much at the top of the market so couldn't put up my fees and still be competitive, so I just had to take the hit. I deregistered in the end because I was effectively paying 40 something percent tax on some of my income when I was only benefiting from less than the average wage, and I didn't want to move to just working with the larger charities. I'd gone over the limit because I was subcontracting work out to other people so it wasn't even as if there was compensation through getting rich from it! It's a big barrier, I didn't find a way around it.

If your expenses include a lot of standard rated purchases at the moment, your costs will also be dropping. You really do need you work out a budget showing your revised costs and work upwards from that to your selling prices. You may be able to increase selling prices in some parts of your business but not others. It's impossible to advise you without understanding your cost profile.

70% of the income is studio classes, we can increase by 50p per class max, any more and we price ourselves out of the market, lots of other similar offering in the area. 20% is retreats, we could potentially increase this price but not significantly, it's a large outgoing to the venue we do it in. 5% is corporations where we can add the vat. 5% is our shop.

Main outgoings are our rent, equipment and staffing costs to our instructors.

You're not paying the tax at all. Your customers are paying it, and you are merely acting as tax collector and passing it on to HMRC, less any VAT your business has paid out to suppliers.

The fact that you feel you can't increase your charges by 20% is unfortunate, but that is what you are going to have to do. You need a chartered accountant to advise you on this one, and to explain it to you more thoroughly.

We can't suddenly add £2 per class, we wouldn't have customers, if everyone is the area is charging £9 and we charge £11 we won't have a business.

I do have a chartered accountant. I was just looking to see what other small b2c businesses did. My network is b2b so I don't have many irl I can ask.

Then you keep the price the same but you receive less because now it's VAT inclusive.

Pp weren't saying you are in trouble with HMRC now, they were warning that if you don't understand this properly you will get into trouble. You still don't really sound like you understand how the flat rate scheme works.

You don’t really have a choice if you’re earning above the threshold. If you’re VAT registered, you have to charge and pay VAT.

Our accountant didn’t warn us we’d gone over the threshold till it was too late, and we were charged retrospectively. We had to absorb the VAT bill ourselves. That was a tough year.

Going forward from that point, some of our regular clients said they weren’t prepared to pay the VAT on top of their usual rate, so we had to stop working with them or face a 20% pay cut! Our new clients were fine with paying it.

You can claim back on certain business-related items which will bring your VAT bill down.

Taking the £9 example.

Before your paperwork would show a fee of £9 no VAT = £9 payable by the customer.

In future, for VAT-inclusive pricing, it would show £7.50 fee plus £1.50 VAT = £9 payable by the customer.

That's irrespective of whether in flat rate scheme or not - what FRS scheme changes is how you calculate what you then pay to HMRC not what you invoice customers.

What that then does to your margin will depend on how much input VAT you could reclaim Vs margin of FRS.

You would be dropping your turnover by switching to VAT inclusive prices.

I don't think this is one to sit and puzzle out on your own.

I'll have another call with the accountant, as I said I we are a few months off registering. I'll ask them to break it down using our data. Thanks

Sticking with the £9...

If you charge £7.50 plus £1.50 VAT then using the flat rate scheme you would have to pay HMRC £0.76 (8.5% x £9). Your net fee would be £8.24.

If not on FRS you'd pay HMRC the £1.50 less the VAT on your expenses. Your net fee would be upwards of £7.50, depending on your expenses.

Your accountant should have gone through this with you using your real business figures.

We have just changed accountants we've had a lot to go over as we have lots of income streams and setting up the systems takes time. I've moved to the accountant I use for my b2b company. We will be having a meeting to discuss vat they haven't been negligent. I was just wanting to read around about how other small businesses navigated it, as I said I only know companies that sell to other businesses in real life.

The small businesses I know either

1. stop trading as much so they don't go over the threshold.

1. Aim to grow their business so they can put up their prices, but the customers can see the value in the higher prices

1. Divide their business into multiple smaller businesses (this takes some work) so they can operate each business separately under the threshold

1. Ask for employees to be free-lancers that can be paid directly to reduce the turnover