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

Yes but a cleaner (ie the subcontractor) is hardly likely to be vat registered.

None of the subcontractor cleaners are vat registered .

@Watchingyou2sleezes is correct - you really need to consider the VAT posiiton of your clients, not exhaustive, but simplified:

Domestic & businesses not registered for VAT - either they will need to pay 20% more, you'll have a lower profit margin - or a mix of the two.
VAT registered commercial businesses - they will be able to reclaim the VAT - an increase of 20% due to VAT will not make a differnce to them.
Charities & non commercial organisations probably not able to reclaim all VAT - 20% price increase will impact them.

also agree with other PP - if your current accountant can't explain things to you clearly in language that you understand, you need a different accountant.

Thanks thinwomansbrain

I'd try and stay under the limit but if you do register for VAT go for flat rate scheme and then you only pay hmrc 12% (plus vat) but you can't claim any vat back on purchases unless a single purchase over £2k. You will charge your clients at 20% on their invoices.
For your commercial clients you can just add the vat and it won't really affect them as they will claim it back. For residentials you can pass the cost to them or pay it yourself.
You'll need to use software that generates invoices for you as each clean paid for needs to show vat. Also your software will need to be able to submit your vat returns for you. You can pay an accountant to do this but it will cost £££
In short, it's a major headache and just not worth it if mainly residentials.
There are a few ways around it for cleaning companies but best way is to stay under the threshold.
VAT is a major pain and I'd advise against. Also get a new accountant as they should be better at explaining these things to you. This has the potential to cost you thousands of pounds per year

In answer to your actual question now I've reread, if you are vat registered you pay (or charge on invoices and forward on to HMRC) vat on all sales, not just those over the threshold

Thank you all sooooo much for your advice. Going to stay under the threshold for sure

Do you work on new build sites by any chance? Because those works are zero rated anyway, you wouldn’t be able to charge VAT on those anyway

Good decision. VAT is a pain because it costs so much to deal with - in increased accountancy bills (returns must be checked every quarter) and the cost of the software required to submit returns electronically. Plus it will make your bills higher which will put off non-VAT-registered customers.

You might want to use the self employment check to look at the status of your sub-contractors: www.gov.uk/guidance/check-employment-status-for-tax

Are your customers private individuals or businesses? If they are businesses, they will probably be VAT registered themselves so won't care if the price goes up as they can claim the VAT back.

This is one of the reasons why umbrella cleaning organisations often struggle. They can't compete with one man bands or groups of cleaners who work together but have clients each pay them directly so no one is over the threshhold (eg with no one central coordinating payment).

Can you change your business model? Have each cleaner pay you a small fee to be a "member" of your group, based on a % of their work. Then cleaners get paid their wage directly by collecting from clients.

@Plantstrees sorry yes you're right I got my inputs and outputs confused - apologies for any confusion everyone - I'll get Mumsnet to delete the post