Baby, don’t fear the VAT man! As Director Martin Wardle explains.

figuresI am often asked about the best way to keep the turnover of a business under the VAT threshold. Assuming everybody is playing with a straight bat there are not as many effective ways as you think. Sure you can ‘split’ your business into two or more but you need to be aware that HMRC can see past anything that artificially treats a single business as more than one.

Trades can ask their customers to buy the materials for jobs themselves rather than supply them, and lose the mark up on the materials as a result.

Within the many other routes taken people also just simply refuse work once they get close to the VAT threshold. Yes, they refuse work! I have seen a plumber that only worked an average of three days a week because he didn’t want to VAT register. His main fear was that nobody would pay any more for his work so he could not afford to ‘add’ 20% VAT to his prices.

Believe it or not this is not an article on VAT, or taxes at all actually, it’s an article on confidence. I started working with a trade two years ago that had this exact problem. He had worked booked in for up to three months at any given time. Good quality work with regular repeat customers. He really had to take on staff to keep up but doing so would have increased his turnover so he deliberately starved his business. He had operated this way for a number of years and as a result had hit an earnings cap.

I talked to him about how good his reputation was, how people were very happy to wait for up to three months for his business to do the work, and we shook our heads together when he had to refuse those BIG jobs. He also worried that if he took on staff he would have to pay them to sit around if he had no work. I suggested that this was an issue confidence rather than the worry of idle staff or VAT fears. After all if someone would wait three months they would probably pay more to have the work done earlier? Also, if he didn’t have enough work for everyone his staff could do what there is and he would be free to look for more!

Eventually the message got through and after three months or so of deliberating we worked together to take on some staff, set up a payroll and register for VAT. As he had so much work on we agreed to do the books, payroll and VAT to allow him to keep his eye on the business. We also reviewed the various VAT schemes to help manage the transition into registration. The flat rate scheme allowed him to pass on less than a 20% increase to customers without reducing his bottom line.

Two years on he is now practically off the tools. Has 10 staff and is actively starting other businesses. And registering them for VAT. Ignoring VAT his prices are now higher than they ever have been but because his work is excellent he has not lost a customer. He doesn’t have a three month waiting list now, he still has one just not as long, but that’s a good thing. It means he is being paid the market level for the quality of work he is offering. Of course his earnings cap has been lifted as well, but you had already figured that out by now I’m sure…

This is not an isolated story. This is an actual client but we have many others like it. The common theme is that VAT can be a debilitating hurdle for many. The real message is that it does not have to be. You don’t need to learn how to do VAT and if you did they are often not that hard. All you might need is someone to sit with you, not opposite you, on your side of the desk to help you see the way forward.