VAT

[somewhereovertherain]

We have a small shop currently trading above the VAT threshold but feeling frustrated that it’s not far enough over to make it worth while and currently working 6-7 days a week.

Need any thoughts if we close one day every week maybe two we effectively earn the same money and also not have to employ anyone.

Turnover looking like £100k this year (including vat)

Vat flat rate scheme approx 7k. Our stock cost would be another 6k ish. So effective £13k of our extra £15k over the threshold is just to pay the vat. If we shut and drop to £85k or less we’d be earning the same money and not milking ourselves.

Thoughts and pitfall please.

Your thoughts are correct. Lots of businesses deliberately reduce their opening hours/days to avoid breaching the VAT threshold, particularly cafes, small shops. takeaways, fish & chip shops etc. You can either open just 5/6 days per week, or you can close down for a few weeks each year (i.e. out of season), to keep your turnover under the limit. As you rightly suggest, you can save overheads such as wages, but also save on power.

Not sure about your thinking re the £7k FRS and also the £6k stock though - if you're on FRS you won't be reclaiming VAT on stock. Or are you meaning stock cost of £6k on the excess £15k of sales?

Once you're over the limit, though, not quite so easy to deregister as you have to get your turnover down below the limit first so there'll be a few weeks/months of cutting your turnover, but still paying VAT on it, until your turnover is below the deregistration threshold.

You also have to be very mindful of timing of sales if you trade just under the threshold. I.e. the timing of Easter as you could have two Easters in the same 12 month period if it's in April one year but March the next, so if you were trading, at say, £84,500 and had two high turnover Easters in the same 12 month period, it would trip you over the threshold again. Same with any other "peak" business period that may not happen in the same month every year, such as festivals, etc. Just something to be aware of as it does trip people up and it's something the VAT inspectors are on the look out for when they look at businesses trading just under the threshold. You may be best to do your sums on trading a bit more below threshold, maybe £82/£83k to give yourself a bit of headroom for unexpected highs.

One final point, the alternative is of course increasing turnover beyond the £100k - thus passing the "breakeven" point.

Thanks for that. The main problem if we push on beyond 100k is we would also need to employ some one as can’t keep doing what we are doing so really need to be at 110k and be beyond but still no better off.

The 6k was the stock we’d need to buy to make £15k which only the pays the VAT bill.

But agree that need to keep further below as do have some peak months.

Yes be careful, it's on a 12 month rolling period, so you need to carefully monitor your income and ensure you stay well below it, to avoid interest from HMRC.

Sit down with your accountant and talk it through with them.

You don't say what your shop does, but what impact will closing 2 days have on the business? I mean will you actually sell less or will people just come another day? If you close will people take all their business elsewhere - does it keep you competitive?

We have a spreadsheet we use along side sage think we can track it.

I’m awaiting our accountant to get back to us at the minute.

Looking at it another way, can you take your 'shop' and add an online option, so you can pick and pack a few parcels when there are no customers, thereby increasing your earnings without increasing your overheads by much beyond the website set up and running costs?

A family member did this, with the opposite effect in a way. They dropped their physical shop hours but in order to not inconvenience customers they increased their internet and distance ordering options. They still ended up employing extra staff as a result of the wider market reach. They were worse off for a couple of years at least, although are now beginning to see the pay off.

My point is, tread very carefully in what you do. Short term gains in reducing your VAT liability may not be worth it in the medium term at least.

Stop thinking of turnover as the amount including VAT.
It isn't. You are merely collecting the VAT on behalf of HMRC so it isn't yours at all.

Why are you on the flat rate VAT scheme? Would you be better off as standard?

You need to talk to your accountant.

Spoken to our accountants and no if we stay registered we are slightly better off on the fixed rate scheme.

But we’ve decided to reduce hours and have a life and drop below the threshold. As it stands we can’t get far enough past current threshold and don’t really want to work my arse off just for the tax mans benefit.

They really could do with looking at the cliff edge that is the threshold

They really could do with looking at the cliff edge that is the threshold

Some muppets from the office of tax simplification were looking at a greatly reduced threshold of just £26,000 p.a.! Be careful what you wish for.

It makes sense. Or at least something tiered like stamp duty as the recent change has opened up the 250-300k house sales market.

Current drop off a cliff system seems nuts.

The Flat Rate Scheme of VAT doesn't really involve that much extra paperwork though does it? The whole of being on it is to cut hassle down to a minimum. You also get a "cut" of the VAT you collect for HMRC on Flat rate scheme. We pay 12% to HMRC and effectively get the remaining 8% as "reward/payment" for collecting VAT.

We pay 12% to HMRC and effectively get the remaining 8% as "reward/payment" for collecting VAT.

Not much of a "reward" for giving up your right to reclaim the input VAT you spend on your overheads/purchases though is it? Maybe ok of you have little or no VATable overheads.

Not to mention it's not a saving of 8%. It's 12% on the gross whereas VAT is added at 20% on the net. So the "saving" is a maximum of 4.7% and less if you are foregoing input VAT.

Especially if your being on a 12% rate means that you are not a low cost trader and therefore purchase a lot of Vatable items, on which you can’t reclaim input Vat.

On the flat rate scheme we save about 300 quid over the more complicated scheme

Anyway decided to de register and trade below the current limits.

Somewhere , I certainly won't argue with your idea of opening less hours as it sounds like a great lifestyle decision regardless.

Just trying to get my head round points others have raised as I am wondering if i have got the wrong end of the stick. I was under the impression that it was of benefit to be VAT registered. If you are on Standard VAT scheme you can claim back VAT paid on items purchased or on Flat Rate Scheme you get a "Cut" of VAT collected. I didn't think that you ever lost out financially by being VAT registered as such. However, I am quite prepared to be told i am wrong as I am not exactly an expert.

I was under the impression that it was of benefit to be VAT registered.

Usually only if your customers are VAT registered businesses themselves who can in turn claim back the VAT you add to your sales prices.

Highly unlikely it would be beneficial if you deal directly with domestic customers, smaller non vat registered businesses etc.

Although charging VAT is certainly not beneficial to non VAT registered customers, surely always beneficial to the business charging the VAT?

Our business sells to mainly VAT registered companies and also some private individuals who are not VAT reg. In either scenario, we make an amount of money by charging VAT via the flat Rate Scheme. If we were on the Standard VAT accounting scheme, we would still be better off as we could claim VAT back on any eligible purchases.

For businesses, charging VAT therefore is financially beneficial.

The only negative I could imagine is if charging VAT makes your prices too high compared to competitors who are not VAT registered. Then it would lead to loss of sales and therefore loss of income.

The only negative I could imagine is if charging VAT makes your prices too high compared to competitors who are not VAT registered. Then it would lead to loss of sales and therefore loss of income.

Nail on the head which is why most businesses selling mainly to domestic customers don't register until they breach the threshold.