VAT - the status of you and your clients


#1

Hi all - me again :slight_smile:

At this stage, this is more just out of curiosity, although in the future (very far down the line…) it might be more relevant.

  1. How many of you are VAT registered?
    1a. Those of you who are, is it as legally you need to be or because you have chosen to be?

  2. How many of your clients are VAT registered vs. those which aren’t?
    2a. Which industries are these each from?

As a newbie, I certainly have no legal requirement to being VAT registered, and I also think it unlikely this will change any time in the coming years (two young girls so can’t work every hour again, yet), but I read an article the other day which had a handful of benefits for volunteering for VAT. So it got me thinking.

Thanks all :grinning:


#2

Adrienne,

You must register for VAT if your turnover exceeds a given amount, check with HMRC for the current rates - deliberatly not putting here incase people look at this in a different year to the one in which I am typing my reply! There are some potential advantages and disadvantages of registering for VAT:

At present the system operates as follows:

• Cannot charge/claim VAT until registered. (You can elect to be registered from the moment you start your business but it is not recommended.)
• There is a registration threshold and process to be followed
• You can voluntarily register (see note below)
• Specific payment dates
• Pre-registration VAT
• Calculating VAT quarterly
• Cash Accounting Scheme/Annual Accounting/Flat Rate Scheme
• Inspection

Note: There are some benefits of registering voluntarily, but equally potential disadvantages:

• Good for cash flow

• Credibility / Professionalism (seen as a bigger company)

• Reduces costs as VAT can be claimed back on supplies and equipment

Personally, I would not recommend it - but its a personal choice issue - less than 10% of my clients were VAT registered when I was VA’ing. The advice from my accountant / Finance Director is hang off as long as possible!

(My clients that were - professional speakers / professional training organisations etc)

I hope that helps
Amanda


#3

Another thanks :grinning: My gut feel is to stay clear of it unless I had to, but I did like some of the advantages. Of course if most clients weren’t VAT registered though, and so couldn’t claim it back, the disadvantages would I’m sure far outweigh the advantages.

Thanks


#4

Hi Adrianne

I decided to voluntarily go VAT registered a couple of years ago, my income is no where near the VAT threshold, but 90% of my clients are VAT registered so it’s not a problem for them, I can also claim VAT back on lots of expenses which does help particularly when I come to buy larger items like a new pc. My advice would be to hold off for quite a while and see who your clients are and if they’re VAT registered, it does take a little bit of extra time to do a VAT return, so you have to weigh up the benefits against the time it will take. Good luck with your business.


#5

Depends a lot on who your target is - big companies probably won’t mind but it’ll put off a lot of smaller companies. Personally I find these ones most interesting to work with, so I work hard to stay under the threshold!!

I also don’t have masses of VAT which I pay - a lot of my costs are subcontractors who aren’t VAT registered, so I wouldn’t be able to claim back much VAT since I’m not paying much.

There was a scheme a while back where if you were specific kind of business (think it was consultants), you could charge the clients full rate VAT and pay the government a flat rate on all invoices but I think they scrapped it - maybe ask your accountant?


#6

Thanks very much. I think you’re right to wait and see how things pan out and go from there. Useful to see though how, in your case, it has made sense to be so voluntarily. Thanks also for the luck :slightly_smiling_face:


#7

Thanks Caroline. Interesting to hear your stance. My concern would be losing out on clients are they’re not VAT registered and thus not wanting to pay VAT. Think it’s best to start of slowly and not try to run before I can walk, as such, and then go from there.


#8

Indeed it does depend on your target audience. With my VA / HR business, I tend to focus on new start ups and small businesses who have yet to establish VAT status, and where cashflow is critical - so 20% on top would not be attractive. My aim in my company is to provide the back office service and establish the processes for the company to grow and when they are able/afford to recruit an administrative person I then hand off to that person to flourish with the company.

In respect to a client. I would advise them to price their service/product right from the outset to include 20%, so that when they do click over the threshold and need to be VAT registered, there is no shock to their customers on an increase in cost.

Best wishes

Serena


#9

That’s interesting … that you do for clients but not for yourself (I mean). But I understand that you wouldn’t be able to attract the type of clients you are targeting if you raised your prices too much.

But it’s also true that the Ted talk I shared with @basingpaservices yesterday did encourage us to think big … though now that I think back, I realise I am not entirely convinced she gave an accurate formula for how to calculate what this would translate into. The onus was on oneself again.
Here it is again if anyone is interested and missed it:

Hmmm … all rather complicated.

Thanks :slight_smile:


#10

So when you become VAT registered do the non VAT registered clients then get a discount so they pay the same (e.g. Your rate is £25, you add on 20% to make it £30, and then if you have to add VAT later, you down it to £25 again?)


#11

Thanks Serena, although sorry but I’m struggling to understand this. Can you demonstrate with some easy figures?

Surely if you add the 20% on now when you don’t have to pay VAT, then, when you come to having to pay VAT, if you don’t change your pricing, it impacts your profitability? As you’re then the one who takes the hit?

Example - price of £10, becomes £12 with VAT, so charge £12, even though not VAT registered. Thus all money remains with me. But, then later on I become VAT registered, so I keep those prices, and so the £12 remains, but then I have to pay the VAT amount to HMRC. Thus I’m losing out that £2.

I’m probably way off here and have misunderstood but would be keen to understand.

Thank you.


#12

Thinking about this some more - maybe that’s correct, but rather than a case of losing out on profit, it’s more a case of giving you the extra before you have to pay VAT, and thus ensuring your clients have the right expectations in terms of cost. Maybe this is a model more for clients who are aiming to be VAT registered in due course, as opposed to others who aim to work with those who aren’t?


#13

Hi Anna

The service I provide is to help businesses get off the ground and to grow. So if they have a product or products (or service) which will increase in growth through sales then eventually they will become VAT registered as they will hit the threshold. Where as I know I won’t hit that threshold for the foreseeable as I don’t want to grow to much just now due to my domestic circumstances and I need to keep my rate competitive and attractive.

S.


#14

Thanks Serena for explaining. This makes total sense now :slight_smile:


#15

Hi Adrienne

Here is an example, I hope I can explain this well enough!!

If I take a client of mine, she charges a rate for a service she provides. She has bookings for next year which have been taken at a non VAT rate. She has been advised in November by her accountant she had hit the threshold for VAT (which was a surprise I hasten to add) and had a month to register or face a penalty. Now all the bookings from that point into next year are without VAT. Should she take the hit/dent in profit which is quite considerable, or go back to client and say I need to charge an additional 20%. If she had included this much earlier in the outset of the company she would have made a profit of 20% for the initial time and wouldn’t now have to talk to clients about a 20% increase once she had passed the threshold.

Of course putting 20% on your cost price at the outset, may not be great for a competitive edge - its a balance. However if the company has high hopes to grow sales and be successful, then its a strategy worth considering.

S.


#16

Absolutely - spot on. And is the conclusion I came to earlier when I was thinking more about what you had said. As you say, it’s a strategic decision and in the instance of your client, would certainly have been the right one had she had done it from the off. Like you also say though, not suitable for all, esp. if not looking/expecting to be VAT registered. As with so many business decisions, it’s not a case of “one size fits all”, so to speak.

Thanks very much for taking the time out to explain :grinning: