Tips for your bottom line by finance expert Ibolya Read
“Once we realise that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes.” – George Soros
Sound advice. If you can learn from other people’s mistakes, however, you’ll be on a stronger financial footing than those that have gone before you. So here are a couple of true stories about VAT registration (names have been changed for confidentiality)
Bob from ABC Construction has worked very hard to build a business that returns a decent profit. He always follows the rules and gets his tax return submitted online well before the midnight deadline on January 31st. Bob is extremely busy throughout the year but even when he is quiet, he knows that tax and figures are not his strongest points. Although his wife helps out with some of the paperwork, she has a full- time job, which is why he usually saves the number crunching for his accountants at the end of the year.
This year, as usual, Bob took all his paperwork to his newly appointed accountants. After they worked through his documents they told him that he actually received £92,000 from his customers and therefore he should have registered for VAT as soon as his rolling 12 month turnover went over the VAT registration threshold, currently £77,000.
Bob was mortified and didn’t understand why he was never advised about this by his previous accountants. His new accountants explained that because he only received £48,000 from his customers last year, there was no indication that he would cross the threshold this year. However, unknown to his accountants, Bob won a large contract just after he filed his last tax return and through word of mouth secured more sizeable contracts over the following months.
Bob instructed his new accountants to put things right. They ensured he was registered for VAT and correctly accounting for this on his invoices as well as reclaiming what he was owed on his purchase costs.
Luckily for Bob, his clients are VAT registered businesses within the construction industry who value his work, so he was also able to re-issue revised invoices and charge 20% extra for the whole period in question. Also lucky for Bob, HMRC decided not to issue a penalty on this occasion.
Although it initially came as a shock, VAT registration has had a positive effect on Bob’s profit and cash flow as a purchase of £1,200 now only cost him £1,000, and he can reclaim £200.00 on his VAT return and use the money to offset his VAT bill.
Wayne from XYZ Builders found himself in a similar situation to Bob but unfortunately his story did not have a happy ending. Wayne is a residential builder specialising in home repairs and extensions. He also had a good year and generated the same amount of income as Bob. And when he crossed the VAT registration threshold without noticing, he too had to go back and re-issue new invoices now showing VAT.
However, asking Mrs Brown to pay £4,000 in addition to the £20,000 she already paid for her kitchen a few months earlier is a tricky business. Failing to get the additional money from his residential clients, Wayne was forced to shave 1/6th off his impressive turnover as this now belonged to the VAT man.
Although Wayne could still reclaim the VAT he paid out on his purchases and use this to offset his VAT bill, this wasn’t enough to cover the outstanding balance he could not obtain from his customers.
Having registered late for VAT, poor Wayne hurt his turnover, his profit and his cash flow. He still has an outstanding VAT bill to pay and a possible fine from HMRC. On top of all this, his prices are now 20% higher than they used to be making him considerably less attractive to his local market. ■
WHAT CAN YOU LEARN FROM THESE STORIES IF YOU OWN A SMALL BUSINESS?
1. There are no excuses. As the registered business owner you are ultimately responsible for ensuring your business meets its VAT obligations.
2. Monitor your finances to check when you are edging closer to the threshold. You can either ask your accountant/ bookkeeper to do this or set up a spreadsheet tallying sales for a rolling 12 month period.
3. Be aware of changing legislation or appoint someone to do this for you.
4. For some companies it can be advantageous to voluntarily register for VAT, others may be exempt entirely. Contact your preferred local accountant for further advice or if your case is more complicated, go to a VAT specialist firm.
For more information on VAT visit https://www.hmrc.gov.uk/vat/ or ring the VAT helpline on 0845 010 9000