Too many people with great ideas and drive let themselves get held back by fear of crossing the VAT-registration threshold. We’ve set out the pros and cons in plain English to help you make plans to grow in 2021.
If you get excited about starting and growing businesses from scratch, it’s really depressing to think people choosing to stay small because that’s what our VAT system encourages them to do. At the same time, I have sympathy with people who are nervous about leaping across the gap.
Here’s the problem: our VAT-registration threshold is the highest in Europe at £85,000 annual turnover, compared to about £20,000 in most other countries. That means you can start and build a fairly substantial business before you even have to think about VAT until one day, BOOM, you’ve got a big bill to absorb, or have to put up your prices, or a bit of both.
Back in 2017, the Office for Tax Simplification (OTS) produced a report on VAT and gave an example of a business with a turnover of £84,000 versus one turning over just £1,000 more per year: “If VAT applied to the whole of the turnover, the VAT-registered business would be liable for an additional £17,000.” Ouch!
You can certainly see why some firms might want to keep their annual turnover below £85,000 a year.
We call this ‘bunching’ – lots of businesses end up turning over somewhere around £80,000 a year and worrying about keeping profits down, rather than forging ahead. Like I said, depressing.
Other reasons to stay below the threshold
On top of the cashflow issues, going over the VAT cliff edge also means you’ll have more paperwork to do in the form of regular VAT returns.
If you’re a retailer, you’ll also have to make decisions about which VAT scheme will work best for your business – point-of-sale, apportionment or direct calculation. Each comes with advantages and disadvantages, which I’ll get into another time.
Also, if you’re selling anything even remotely unusual or innovative, you might struggle to decide the correct VAT rating. Over the years, accountants have got a lot of amusement out of the stories of VAT tribunals trying to work out if vegan brownies are cakes, or whether ‘slankets’ count as clothing.
Finally, since April 2018, VAT-registered businesses turning over more than £85,000 have been obliged to comply with Making Tax Digital (MTD). That means recording financial information and reporting it to HMRC using software, from beginning to end.
And reasons to go for it
I’ve made it sound scary above, haven’t I? But it isn’t. If you’re smart and driven enough to run your own business, you can cope with VAT – especially with a good accountant to support and advise you.
Lurking below the £85,000 threshold might work for people operating a side hustle, or who are happy to make modest money and stay small. But that doesn’t sound like most of my clients.
And MTD certainly shouldn’t be a concern. We’re all going to have to be MTD-compliant before too long, so why put it off? If you’re set up with Xero or QuickBooks like most of our clients, you’re already there.
Fix the system
Ideally, what would happen is a change to the system, and the Government has signalled it’s up for it – eventually. For now, though, the VAT-registration threshold is set to stay as it is until at least 2022.
For advice on VAT or help with registration or VAT returns, get in touch.