To ask you to explain how VAT works please… soooo confused!

[1988TBT]

I own a cleaning business and am trying to stay under the VAT threshold of £85000 turnover for obvious reasons , but I’m very close to it.

but I cannot for the life of me understand how it’ll work if I do go over it.

Say my turnover ends up being £91000 over a 12 month period will I pay vat on every penny or just the amount that’s over the £85000 threshold. It just all seems so backward and unfair. If I have to pay it on the whole lot it’ll take my profit down to almost zero to literally not worth working.

I already charge a high amount for the cleaning and can’t really put the prices us a whole 20% to cover the VAT as it’ll make the cleaning cost in the region of £22+ per hour which customers just won’t pay.

Thanks in advance for any much needed advice! X

So you will pay VAT from the date you register, not on your previous sales. There are rules about when you must register by so check HMRC for that.

From that point on you pay VAT. Whether you absorb that cost into your business or whether you put your prices up is a decision for you and a tax advisor/accountant.

Thanks, so then vat on every sale thereafter that point? What if after a couple of months I drop below the vat threshold again?

It works on a 12 month cumulative basis, if in that 12 month period you drop below £83,000 (the second registration threshold) you can ask HMRC to cancel your VAT registration.

You can apply for exemption if you think your sales will drop back down or you can register then de-register.

I know lots of people who make sure they stay under the VAT threshold by refusing work/only working part the year to avoid this dilemma.
The VAT system seems bonkers to me!

I would highly recommend speaking to a tax accountant and getting advice though. It's not something you want to mess up.

@MrsMcCluskeysCat

It works on a 12 month cumulative basis, if in that 12 month period you drop below £83,000 (the second registration threshold) you can ask HMRC to cancel your VAT registration.

That was supposed to say 'deregistration threshold', no idea where second came from!

Are you working for other businesses or private clients. If your customers are a business they will likely be registered for Vat too so any Vat you charged on top will make no difference to them as they can claim it back.
You can also claim back the costs of vat on cleaning products.
This may not amount to much as i assume the majority of your cost is labour but its something.
For private clients. I would meet in the middle and raise your prices 10% and swallow the 10% yourself.
There is also a flat rate scheme which i beleive is suppose to simplify for small businesses

You can get a waiver of it's only going to be a temporary thing. You really do need professional advice.
V.A.T is actually quite simple , if your clientele is mainly domestic you should try to avoid the threshold for the reasons you mentioned. There are lots of ways of avoiding the threshold if you need to.

Thank you. I do have an accountant but she tends to talk in accounting jargon that I struggle to understand but she said similar, basically either bite the bullet and grow the business through the vat threshold or make a point of staying under it.

About 75% of my income goes back out as sub contractor wages so this is why I’m a little reluctant to bat register as it just doesn’t pay off in terms of my own profit

I agree that the tax system is imposing an unfair problem on you.

People sometimes try to split up their business in this situation, but it's quite hard to do it well enough that HMRC will accept that the businesses are separate.

www.accountingweb.co.uk/any-answers/splitting-company-for-vat-purposes

I worked out how much I needed to grow by in order to make it worth while for me and embarked on a quick expansion. You can calculate, or rather your accountant should, whether it is more beneficial for you to go onto flat rate or the standard scheme. You claim back VAT on the previous four years purchases when you register and this will come off your first bill. Don't forget it is all digital, so if you do not already have compatible software for this you'll need to get it.
It isn't as easy to deregister as it is to register, so consider this carefully.

Would it help if you registered for the flat rate scheme? I think you'd only have to hand over 12% of turnover to HMRC in that case.

@thepastisanothercountry

You pay VAT on your input (i.e. income)

You claim VAT on your output (i.e. the VAT you've already paid out on goods and services. You can claim for things like petrol, cleaning products, advertising, administration and all sorts of other things provided the supplier was VAT registered and charged it to you)

You pay the taxman the difference between input and output. So if your input is £350 and your output is £250 you pay the tax man £100

You mean you pay the taxman 20% of the £100 profit?

@lovingnewme no, In PP's example the £350 is the input VAT and £250 is the output VAT so £100 is paid over to HMRC.

You either stay below the threshold or you start charging your clients vat.

Sorry but if you are relying on sub-contracted staff you may have another problem too. Please talk to your accountant about IR35!

The question you need to ask is whether your clients are VAT registered businesses or private individuals. Only then can anyone help you make a decision whether to register. If you exeed the threshold in a 12 month period registration is compulsory and you will need to add 20% to your prices to cover VAT and issue VAT invoices for all your sales after your registration date.

@thepastisanothercountry

You pay VAT on your input (i.e. income)

You claim VAT on your output (i.e. the VAT you've already paid out on goods and services. You can claim for things like petrol, cleaning products, advertising, administration and all sorts of other things provided the supplier was VAT registered and charged it to you)

You pay the taxman the difference between input and output. So if your input is £350 and your output is £250 you pay the tax man £100

I think this is the wrong way round. You charge Output VAT on your sales and claim input VAT on purchases that include VAT. This example is confusing.

If you charge a customer £100 you will need to add £20 Output Vat so they should pay you £120 in total. Of that you will pay £75 to your staff and £20 to HMRC so a profit of £25 less any expenses such as petrol or cleaning products (which you can claim the VAT back on). It shouldn't impact much on your profitability but you will need to charge more so that is the issue. If you still want to charge £100 you would pay £17 to HMRC and £75 to staff so your profit would reduce to £8 less expenses. Therefore it is only worth going over the threshold if you can increase your fees to cover it.

An alternative model (but speak to your accountant) that would avoid the VAT registration and the IR35 issues would be to act as an agent for the staff and take a cut from them. The cleaning staff charge the client directly £100 but pay you £25 as an agency/franchise type fee for organising the work etc. You get the same profit but have a much reduced turnover so will not reach the threshold and the staff will be legally contracted!

You should talk to your accountant - or get a different one if you leave a meeting with your current accountant & you still don’t fully understand your accounting / tax situation both now and the implications for your expected future business activities.

You should also have your subcontractor situation reviewed. You should be aware of the ‘off-payroll working rules’ & how these may or could potentially apply to your business.

Ultimately, as a PP said, if your clients are also VAT registered (which many businesses will be) you registering for VAT will have no effect on them - so not a problem if you increase your fees by the 20% VAT.
If your customers are primarily individuals who are not VAT registered- you have to decide how to proceed as they can not reclaim the VAT on your invoices.

I've never even heard of house cleaning services being subject to VAT. I would make the cleaners self employed and be an agency. I don't think a cleaning agency or one who supplies carers charges VAT. It would be too expensive for customers.

I've never even heard of house cleaning services being subject to VAT.

Probably because most of the cleaners you use aren't making £85k so they're not required to register.

Flat rate scheme is simple to use

You only pay VAT on the profit really, as long as your costs have VAT included? So if your sub contracter charges you VAT you can deduct this from your VAT bill.

For example:

You have invoiced someone for £80 plus VAT
You have to pay £60 plus VAT to subcontracter
Your other costs like cleaning fluid included £10 of VAT

£16 would be your VAT bill for what you invoiced, but the VAT on your costs was £22 so you are actually owed £6 by HMRC 😊

It's only if your subcontracter isn't VAT registered that you will seriously miss out.