Twas a pleasant Sunday morning in May 2013, that an ear-splitting shriek could be heard across the roof tops of Dumfries. Was it a spider in the bath? A weekly step onto the bathroom scales? No, it was me on realising that my online sales were about to break through the VAT threshold and that I would need to register with HMRC – immediately!
Now I had long known that if my sales increased beyond a certain point, then I might, one day, have to think about VAT registration. But I had the daft notion that it would all be retrospective; that if I exceeded the VAT threshold in one year then I would not need to register until the following year – and that would be ages away. I would be able to ponder the matter for months and, if the whole thing seemed like too much faff, I could simply limit my trading, stay below the VAT threshold – and keep life simple.
But, out of nowhere, my time was up. Because VAT registration is required as soon as your sales turnover meets the threshold (currently £85k), or if it is going to meet the threshold within the next thirty days. According to my figures, I had arrived at the gates. My turnover was pennies away from the threshold and I was about to be sucked forever into the murky world of the tortured and the VAT registered.
My first reaction was to prevent this terrible event from taking place. There was no way I intended to be VAT registered. I was a ‘sole trader’ for goodness sake. A ‘small business!’ The very thought of being VAT registered brought me out in a sweat. My profits would surely disintegrate; I would cry and crumble every quarter when it was time to submit a VAT return. Maths had never been my strong point and I was sure to make a terrible mistake on my paperwork; There was only one place this VAT malarkey would end – and that was in prison.
With ‘the fear’ firmly on me, I tried desperately to think of a way to body-swerve VAT registration. If I refunded everyone who had purchased from me over the last month then I could lower my turnover and delay the need to register. Maybe I could close the business for the rest of the year in order to avoid the horror. Or if I wanted to keep trading, then maybe I could split the business in two so that both sides fell below the VAT threshold.
Gulping at my coffee, I scribbled down more ideas. I could change my whole business and sell items on which there was no VAT (like biscuits, live chickens and cycle helmets)! I could consider a move to the Channel Islands where an apparent loophole might save me from registering for VAT. Then again – could one ever trust a loophole in these Crown Dependancy areas? Safer still, would be a move to China from where I could export my products to the UK without being registered for VAT.
The ideas kept coming and within hours, the day had taken on new hope. My independent brain storming session had unearthed a plethora of ways to avoid registering for VAT – except they all felt a bit silly.
Actually, they were outrageous.
There was, of course, a far simpler solution. Maybe …… maybe…. I could just register for VAT.
I let the notion sink in for a few minutes and then considered the matter afresh. Puffing out my chest, I realised that, of course, this was a scary milestone, but it was also a brilliant one. Imagine this! Little ol’ me! VAT registered indeed! I must be doing GREAT to have reached this point.
And so, like thousands of other people, I did indeed go on to register with HMRC and when my VAT certificate and number arrived in the post I regarded it with pride. I felt as good as I did the day I received my 50 Metre swimming badge at the school. The message was clear; I was serious about this business and my VAT registration made sure everyone knew that. VAT registration had once felt like an impenetrable wall – but now I was on the other side of it!
Does this sound familiar? If you have been loitering around the VAT threshold then you may well recognise ‘the fear’ of which I speak. I can only speak from my own experience, but you may find it useful.
- Yes, I wanted to stay below the VAT threshold, but there wasn’t a genuine business reason to do so. It simply was ‘the fear’. I didn’t have the confidence, time or knowledge to take this step forward. But I had to remind myself that reaching the VAT threshold proved that I was already capable of running a business. I owed it to myself and my business to let things flourish.
- Yes, I freaked out, but I did the maths and worked out what the financial impact was going to be. In simple terms my VAT bill would be the difference between the VAT I owed for the goods and services I sold (output tax) – and the VAT that I would now be able to reclaim (input tax) against applicable business expenses. The net VAT bill was less than I expected.
- Yes, I was worried about the paperwork but there are some great accountants around who do not charge the earth! My accountant is a cool guy called Mike and, with his help, registering for VAT was pretty straightforward. He also made me aware of various simplified VAT registration schemes which may suit some businesses – but the standard registration process made more sense for me.
- Being VAT registered meant that I had to rethink my prices, but, sadly, firing up a 20% increase to my customers was not an option. My products would have struggled to compete against similar, lower priced products. Instead, I had to take a hit on my profits but, fortunately, this was short lived. Being VAT registered meant that I could grow sales and, with my increased turnover, the bottom line soon returned to pre-registration levels and beyond!
There will be LOTS more to say about VAT in future articles but, for now, it may be of comfort to know that many of our international business counterparts face VAT registration from the outset i.e. there is a threshold of zero. The UK has one of the highest registration levels in the world which, in some ways makes us fortunate, but in other ways it imposes a ceiling which many are reluctant to break through. Registering for VAT terrified me, but it was a no-brainer for a retail operation and my business has benefited from increased credibility and the freedom to grow.
Heaven forbid that it should all be plain sailing though! A terrified scream will shortly resound, once more, across the rooftops of Dumfries. It will be me on realising that an unprecedented increase in French online buyers has brought me perilously close to the VAT threshold for France. Once again, I find myself breaking out in a sweat – this time at the prospect of trying to register as a VAT paying company in another country! And I don’t even speak the language. I am terrified and already pondering whether to pull the shutter down on French buyers to avoid this new horror. Or maybe I could split my business in two so that both sides fall below the threshold……. is it too late to move to China……. and are live chickens zero rated in France…….?
The Chartered Accountant’s Advice
I asked Castle Douglas based Chartered Accountants Bell Ogilvy for their opinion when a business is nearing the VAT threshold and partner Eilidh Harman passed on this advice.
“Registering for VAT is a big step for most small businesses. Owners are concentrating on running their business and often don’t have the time or expertise to account for VAT on all of their transactions. It is very common to try and keep your sales below the threshold, but at some point you may have to take the leap. Your Chartered Accountant will be able to guide you through this and make sure that it is an easy and simple transition for you and your business. There are different VAT schemes for different types of businesses and it is important that you are set up on the one that is most suitable to you” – Eilidh Harman, Partner at Bell Ogilvy Chartered Accountants, Castle Douglas
Bell Ogilvy will help set up a bookkeeping system that is simple and easy for you to process which will help take the stress away from you. Many of our clients prefer that we do the bookkeeping and VAT submissions for them so that their time is free for them to develop their business. If you would like any help or advice regarding VAT registration please give us a call on 01556 502377 to discuss what we can do for you.