To worry about the effect of VAT charges on my business?

[BallsforEarings]

Our small company will hit the VAT threshold this year and, although other similar companies say it will be fine once we have got that milestone over, I am a bit worried that the price increases necessary may seem off-putting to regular customers (long-term clients are my faves, would hate to lose these ones!).

It is a cleaning business and although I think we may be able to absorb around 2% of the cost ourselves, we are going to have to raise prices by the remaining 10% in order to continue to grow and thrive as a company with a future (I am going for the 12% flat rate at first!)

What will clients think about a ten percent raise in rates? I am already selling to new clients at the new rate and that is fine, I still get the vast majority of jobs i go to quote but what about existing regular clients? Will they mind a ten percent price increase?

I know I should in business but I'm not great at implementing even small price increases and try not to do it much even though it's never caused a problem when I have done in the past, I just hate it sooo much and it makes me feel a bit poo, which I know is not the point at all but my feelings get in the way! I don't like talking money after the original price is set up!

We will hit the VAT threshold early next year if our sales remain the same so I need to know if people will pay ten percent extra or will we lose a few clients? What is your opinion - is this really something to be concerned about or will it go smoothly do you think?

Thinking purely with business mind - we can afford to swap out a few clients if we must but emotional mind is saying 'I love my old clients and don't want to lose the relationships!'

What do you think will happen?

Oh bugger - when I said this year I obviously meant next year 2015!

It depends what clients are currently paying you - ten percent of fifty quid is five pound, which I shouldn't imagine would raise many eyebrows.

You may wish to keep your 'good' customers who give you regular work at the old rate, and maybe increase twelve or fifteen percent for new clients. Or, if you're comfortable with the money you earn, try and keep below the vat threshold. I've often thought that the vat thresholds discourages people from growing their business - it is such an extra cost and administrative burden.

Mind you, at least we have a vat threshold - a lot of countries don't in the EU.

But to be honest, most people will expect an annual increase and are normally understanding.

Thanks Clash they are mainly all paying less than fifty per week so I'm glad you think that it'll be ok to raise 10%.

We have stopped doing one-off cleans as there's no time on our schedule and as fast as we hire and train the new staff get booked up within weeks so that mean all our income is from our trusty regulars, I like them all but can't help favouring the ones we've had for years though and wouldn't want to lose those ones, maybe a few favourites can stay on the lower rate!

You are right in what you say, VAT is very discouraging for a small business owner, I was tempted to just roll on as we are but that defeats my objective, I would like to see some more growth yet and I just need the confidence to push through!

The paperwork is off-putting too, I hate extra admin, I think its because I used to be an administrator!

Only use the flat rate scheme if you think it will be beneficial to you. I imagine from the nature of your business that the bulk of your expenses don't attract VAT, but do the sums first based upon your current sales & purchases to see if the FRS is worthwhile at the 12% rate.

If you have commercial contracts eg office cleaning, most customers will be VAT registered so will not bother one jot as they can just reclaim the VAT they pay.

If you have domestic customers do you have a contract with them. My contracts have a clause in that any charges beyond my control get passed to the customer.

Thanks Stickerrocks - our supplies are mainly just cleaning products and equipment so I do think the flat rate will benefit us more.

Raltheraffe - we hardly have any commercial, just a few small offices, I'm not so keen on a lot of commercial I do prefer domestic so the bulk of our clients mostly are not VAT registered.

We don't have contracts for them but there is an agreement and I think I will take your advice and put that item in the agreement, since I should be raising them yearly anyway and also when there are costs beyond our control, thanks for suggesting it!

If you update your agreement/contracts like this do you then send out the new version to everyone or just to new clients from that point on?

Also have you ever lost a client through price increases, would this ever happen? (sorry for all questions!)

Given that you've said it's less than £50, I reckon it will be an extra £2-£3 a time for most clients?

It really isn't a huge increase for them, particularly if you have kept prices at the same level previously. I wouldn't announce the price increase at christmas time though - I think people are more sensitive with price increases then.

I would expect cleaner's rates to go up on an annual basis anyway. It sounds like you are getting a lot of word of mouth recommendations if your new cleaners are getting booked so quickly, therefore people are happy with the service you are providing - and I think cleaners are one of those things where people are happy to pay a small amount more for someone they 'like'.

Don't forget that you'll get a 1% discount off your flat rate percentage in your first year of registration (not sure if the 12% is including that or not)

It depends on your business but when one of our suppliers was due to hit the vat threshold they let us purchase 3 year's worth of their product just before they started having to add vat, so we effectively had a 3 year price freeze and plenty of time to get used to what the new price would be. I realise there's a lot of products and supply chains this wouldn't work for.

Oh and you have to charge your customers 20% VAT not 12% ie your invoice must show the standard rate of VAT. However you pay VAT on your return at 12%.

Remember you'll also be able to reclaim VAT on the items that you purchase so that off-sets some of the costs. If you have long-term clients that you think might leave then I'd be tempted to absorb the VAT for them, and start with increased rates for new clients.

I also think you should make an appointment with a VAT specialist to be sure you're entirely clear on your obligations and responsibilities.

As for renewing contracts, when we update our contracts we do so with all our clients. It's too confusing to have different terms running for different customers. I would never just send out a new contract. although I know lots of companies do this. I'd always discuss it in person and ensure I had a signed copy of the new agreement to put on file.

Can you split the business and have 2 separate businesses, may be 1 for domestic and 1 for commercial ? Then you may not reach the vat limit on either.

If you explain to them and assure them VAT invoices will be provided so they can reclaim VAT then I think you should be fine. Congratulations on your growing empire.

Wow thanks everyone this is so new to me!

Clash - our minimum price is £30 per visit so £3 will be the smallest most clients it will be more like £4 or above so you still think, with our good reputation and premium service level we can ride it out? God I do hope so, it will be about march time I estimate!

I have to go out now but feel a new batch of questions coming on - thanks so much everyone!

If you are doing a good job I think you will be OK. Two bits of advice:

1. Give your customers as much notice as possible of the increase.
2. Explain clearly that it is due to VAT, not a price increase.

allmycats, that wouldn't make any difference. As she would own both businesses and they are carrying on the same trade they would both then have to register for vat.

Also remember that the flat rate percentage is calculated on your gross sales figure, whereas the 20% vat you will be charging is calculated on the net figure, so it's not as simple a calculation as you might think to work out the difference.

For example, if you charge someone £100 you will charge vat at 20% of this, so £20. If you use the frs you will still need to charge the same amount of vat but will pay 12% of the gross amount of £120, ie £14 approx.

Balls, what Little says is correct - you must add 20% to your rates - so your starting price will now be £36, instead of £30. The flat rate simply means what you pay to the VAT man - 12% of your gross takings (inclusive of VAT).

Being VAT registered should help your business really, because you can now reclaim VAT on your purchases - which you're choosing to do by using the flat rate. You may find you can absorb more of the raise than you think by lowering your prices and adding less VAT because you're making up the difference in reclaimed VAT.

Have you got an accountant? It might be worth the £500 a year to be sure you're getting all this right - I'm not an accountant, I just use one!

Is the cash-accounting method still available to businesses? Where you only hand over the VAT charged to the Revenue once your clients have actually paid your bills, not on the quarter when the charge was raised?

I only pay VAT receipts, not invoices (thank God!), so I assume it's still kosher...I don't know what variation there might be between different businesses though, because for example my flat rate is 14.5% not 12 like OP's

What allmycats suggests could land you in hot water with HMRC as they would probably view it as artificially splitting your business. As discussed by bitter and porridge you could benefit from cash accounting (you can't use the flat rate scheme and cash accounting but the flat rate scheme has a 'cash based' method of calculating your turnover which is v similar)

Ok thanks for all these replies and so am I right that if a person pays our minimum charge of £30 it will go to £36 UNLESS I lower their rate to say £27.00 or something plus VAT (£5.40) so bill them for £32.40 is this legal or advisable do you know?

Yes, you charge what you want and then add another 20% for VAT. Like others have said, its unlikely to be an issue for your VAT registered customers as they can just reclaim the VAT you charge them.

If you decide to go on the flat rate scheme you pay HMRC VAT at 12% (11% for the first year) but you can't claim any VAT back on your purchases and overheads. If you choose not to use the flat rate scheme then you charge 20%, pay 20% but you can offset your VAT on purchases and overheads.

Thank you LittleG69 and everybody,

I will have a think about how to make it work then (I just used the above sum as an example so need to figure what amount to reduce by in RL so that both ourselves and the client share the amount of VAT I actually have to pay and we will still be viable and able to go forward safely!

I don't want to go to far with commercial as we love residential clients the best but we can do a bit of office cleaning, I won't make decisions based on the commercial factor though as the huge bulk will be resi.

I do have an accountant but thought I'd glean what I can before I have a conversation with him as it will take me while for all this to sink in, I wanted a heads up, I've learned a fair bit here thanks to you guys - big thank you!

Can anybody tell me if it is a lot of extra admin or is it fairly simple?

Also what would happen if sales fell back below the threshold in any period AFTER we are VAT registered ie say we scaled back business if several staff left at once or something and we couldn't maintain all our client base? I hope not but just wondered?

You can apply to de register if your sales are expected to be below the VAT threshold for the next 12 months (ie not just a few month when you expect sales to be less)