VAT will ruin my business

[justasmallbiz]

I run a small business which comes close to, but doesn’t yet cross, the VAT threshold.

I predominantly sell digital products which are made using Word and my expertise (people are paying for that part) and we’ve been running a couple of years and are doing well. I’ve always been conscious of the threshold and we’ve carefully stayed under it. Now we will go over it on a rolling basis as our business has grown (yay) but the costs for VAT will either heavily cut down the viability or drive away customers. We cannot claim VAT back as there’s nothing to really claim on, so this is just a nightmare really.

I need to build a strategy to prepare. Anyone been in a similar position?
Praying Reeves doesn’t make this even harder.

If people are not prepared to pay 20% more, you work less and go on holiday once you hit the threshold.

Flat rate VAT if that’s okay is still an option going forward?

Have you offset your working space off against tax? If not, would that bring you under the threshold?

Are your customers businesses or consumers?

I could be in a similar position in the next few years, will probably close more regularly rather than working all year round.

Can you split into two companies? Is it just one product?

It’s the turnover that counts, not the profit

Have a month off every year or however many weeks you need to take off to ensure that you don't go over.

Don’t do this - it’s tax evasion and called disaggregation.

Otherwise could you use the flat rate scheme as you don’t have many costs.

Using the scheme you don’t recover VAT but pay VAT at a rate lower than 20%.

Also are your customers individuals? If not, and you’re selling to businesses they won’t care about the price rise, as they can recover the vat anyway.

Ah, okay 🙈

And this is why I have an accountant!

VAT is a massive headache for small businesses abs you've got my sympathy, OP.

Suggestions are:
-Do less to stay under the threshold

• Conversely, repackage your products (with VAT built in) and sell the expertise at a higher price

You have not mentioned if you sell to consumers or businesses. Its a fact of life for business and I've seen plenty of online info products add 20% VAT at the till. So...options.

Presuming you're only selling in the UK so aren't registered for MOSS?

(Don't want to set hares running here, but if you are selling to EU you may have VAT obligations in those countries rather than the UK ...)

The VAT cliff edge is a problem. Looking at the flat rate scheme would be a good idea, although it sounds like you may fall under the Limited Cost Trader category.

It is frustrating in that it discourages growth for smaller businesses - potentially reducing profit margins down to nil.

Are your prices at the max the market would bear already?

Are your customers individuals rather than vat registered businesses? If they're VAT registered businesses there's no issue as get can just recover it and it doesn't put up the actual cost to them - individuals you're in the unenviable position of having to either increase the cost to them or having to bite a fifth of the price

Work from my laptop anywhere - usually the study!

Yep - HMRC would still view the businesses as one!

We sell to individuals. They are extremely price sensitive and it’s a competitive market.

A business that I was an occasional customer of a few years ago was in this position. When they were approaching the threshold for VAT they ran a special offer - deadline the last day of the month, prepay for what you think you'll use over the next 3 years at pre-VAT prices and a 10% discount, prices will be having VAT added soon.

If you can do that and set the "prepay" money aside (ie don't spend it as a windfall) then that will give you a cushion when things rebalance.

Any customers who are registered for VAT themselves won't care. Anyone who really needs your services will pay what it costs. Most people who would choose between your services with 20% VAT added vs a competitor with less experience and who is less popular so can charge 20% less will value the fact that your work is intrinsically more valuable and will pay the extra.

HMRC got wise to that, years ago

your options have been identified, all you can do is choose one:

• actively restrict your sales to stay under threshold

or

• "do nothing" ie. go over the threshold and take the financial hit until you have grown your turnover to the point where your profits have recovered

if you go over the threshold you will be required to charge 20% Vat to your customers. Nothing you can do about that. If it means you lose turnover and drop below again then deregister at the first chance.

Whilst VAT registered, your profits can, to an extent, be "massaged" by choosing the best way to declare your VAT. If you go flat rate scheme rather than the standard scheme, and turnover remains below £150k, it does sound like you will be a limited cost trader (goods purchased = lower of: 2% of turnover or less than £1,000).
On the LCT basis you'd charge 20% to your customers but only pay 16.5% to HMRC so have a little bit of headroom on your profit margin