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.
The Fear of VAT
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. Perhaps I could change my whole business and deal only in services which are exempt (like funeral plans and bingo). 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?
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.
Facing the Fear
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!
It Ain't All Bad
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! I was also able to reclaim all of the VAT I had paid on business purchases during the previous three years. This meant that my first VAT bill actually took the form of a cheque from HMRC to me!
There will be many mentions 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.
Voluntary Registration (Not as Crazy as it Sounds)
Don’t forget that you can register voluntarily for VAT even if you haven’t reached the threshold. This is not as crazy as it sounds. Being VAT registered can make you a more attractive and competitive business partner to other VAT registered businesses. Many larger companies are looking for a VAT invoice for their purchases and if you can’t provide one then you may be overlooked. Remember, if you are not VAT registered, the business world also knows that you are a small operator.
Other benefits of voluntary registration are that you can start to reclaim all of the VAT you have paid on expenses relating to your business. In those quarters where your business expenses have exceeded your income, you may again be entitled to a VAT rebate. For some businesses, voluntary registration can be even more advantageous. For example, if you buy in standard rated goods and services – but you sell zero rated goods then it makes financial sense to be registered.
Staying Ahead of the Game
Whatever you do, make sure that you do register as soon as you are required to – if not before. There are penalties for late registration and, with so many payments being made online these days, it is not easy to hide from your responsibilities.
Finally, if you are only operating in the UK then the post Brexit implications for EU VAT may not affect you but if you are, or intend to be, importing or exporting between the UK and EU there is much to learn! The new VAT requirements are way too much for this blog but there are plenty of other articles out there which may help you to understand it. I confess that I am still learning about EU VAT myself but as soon as I think I have the hang of it then I may well attempt to blog about it!