Should you register for VAT or restrict growth?
Tamebay reader and occasional contributor Glenn was recently faced with the decision whether to register for VAT, or to restrict his business to trade beneath the VAT threshold. It’s an issue which many online retailers have faced, including myself, as in almost all circumstances registering for VAT will impact profits without a significant rise in sales. Today he shares his VAT registration decision:
In August 2012 I was faced with a major decision concerning VAT registration and business growth. To put the matter into context, I have been retired 5 years and receive an occupational pension and selling on eBay and Amazon was primarily a method of supplementing my pension. For the last 5 years my annual turnover has always been below the current years VAT threshold and as such I avoided paying any VAT. (I have paid corporation Tax for a number of years)
As I prepared for the Christmas 2012 market I realised that my anticipated seasonal sales would take me over the threshold and like it or not I would need to register and commence making VAT payments. I seriously considered reducing my listings, increasing prices and basically attempting to keep my turnover below the threshold.
Having calculated different options with pen, paper and spreadsheet and more importantly having discussed the issue with our accountants I realised that business growth could push us past the grey area between registration and additional profit.
Depending on your sales sector there is a grey area between the registration threshold of £78,000 and around £98,000 were additional turnover has no benefit to profit whatsoever. In fact there is a real danger of increasing turnover and decreasing profit. Touching or drifting over the threshold is something to be avoided and unless you feel confident than that your turnover will increase substantially take care!
We took the plunge and registered and thankfully we are out of the grey area, thanks to a fantastic Christmas.
Registering for VAT caused me many sleepless nights, but now we know it was the right decision I feel liberated. Don’t get me wrong I take no pleasure in paying the VAT man, but now I have removed my own restrictions and limitations I am free to develop and grow the business.
My only words of advice to any other seller in a similar situation are speak to an accountant. My accountant isn’t cheap, but if you pay peanuts you get monkeys.
Doing things “legit” really is only a concern if you are *just* meeting the threshold. Even then it’s surely a no-brainer if you’ve managed to build the business up to that scale already and can handle the workload that you would want to keep building it. Although I guess as you are beyond retirement, the question is more one of your own commitment in the medium term… Consider your well being first and foremost!
Growing the business further certainly wasn’t the only concern when I had to register for VAT, that was the least of my problems!
Prior to VAT registration I was working from home. Post VAT registration growing the business meant I had to get a warehouse at considerable extra expense. Apart from the rent it increased supplementary costs such as travel which hitherto I’d never had, an extra phone line, a new Internet connection, new printers and office supplies, a fortune on racking etc etc.
Growing the business added a whole load of overhead which combined with VAT registration meant that I had to increase from the then threshold of £70k to well over £100k but importantly I didn’t make any extra profit.
Unlike Income Tax VAT isn’t on a sliding scale and you don’t pay it on your increased sales, you pay it on ALL your sales below as well as above the threshold. That’s a mistake the government has never had the budget to rectify and encourages a lot of small businesses to restrict their sales rather than grow their business.
Chris, I hit the “do I, dont I” time a few years ago when my turnover hit £64K. The VAT threshold was something like £67K and I ended up ceasing trading for a bit over a month so as not to reach the threshold.
Everything was going well – after all you don’t normally stop trading to reduce sales.
But since that time the recession hit in Garden related products and I have never got back to that level. Gardeners Cottage is my 2nd income – my plan for my pension! – and although I would love to make it my 1st income it just never produces enough, especially as I had to take out storage which the government last year decided should carry 20% VAT!
Just over a year ago I re-branded and got a new logo and new website at great expense but it hasn’t taken off. Ebay sales stopped for some unknown reason but Amazon has saved the day this Christmas for me.
Will I ever get back to that question – register for VAT or not?
“if you pay peanuts you get monkeys” – I like that, very good!
Noting that Glenn is retired and receiving an occupational pension a factor in the decision has to be additional workload, overhead, responsibility and the lifestyle that is desired. It is not always about money and profit.
If the additional turnover required can be achieved without any impact on lifestyle and workload then go for it. Inevitably once the decision is made turnover can grow quickly and you can of course reclaim inputs so depending on your business the benefit tipping point may be lower than £98000.
However if there is a serious impact on lifestyle (longer hours, shorter holidays, less family time, etc) then this has to weigh heavily in the decision making process. Growing turnover is not for everyone. There are many who are satisfied with steady regular revenue.
Speaking from experience one of my family who runs a catering business deliberately restricting opening hours to remain below the VAT threshold. 3 or 4 years ago they decided to register for VAT and extend the opening hours. They picked up trade very quickly as they became the regular haunt for customers who knew that they would now be open regular daily hours. They now feel they should have made the decision years ago.
Another family member was registered for VAT but had poor accountancy advice. For years they filled in the quarterly returns and paid the difference between inputs and outputs. This was a paperwork nightmare but had to be done.
Only recently they discovered that they could have registered for the simplified scheme which only requires you to pay VAT as a percentage of turnover at an agreed industry norm which for them was 11% of turnover. This reduced paperwork by 99% and also reduced the amount of VAT paid.
So you do need a good accountant. The one they used did not advise them of the availability of the simplified scheme.
Just as an aside the 2 family members did not speak to each other about their businesses and did not share accountants! They should have visited Tamebay! :-)
Good points Gary
I took early retirement at 50, and could still be in paid employment now if I had chosen to do so. I was earning a lot more back then than my online business, but was working 60+ a week, with 2 hours commute every day and was slowly killing myself
Working 40 hrs on our online business, with very little commuting is easy peasy and as an Amazon FBA seller I can rest up and take time off any time I want. (My primary reason for using Amazon FBA).
We use the Flat rate VAT scheme and it’s easier to use than Turbo lister, so ‘Yes – always speak to an accountant before making any decision concerning VAT.”
When accounting for VAT it is important to know that the VAT man counts postage charged into your income.
So your threshold for VAT is Sales Price + Postage Charged.
To make the postage thing clear you may have £70000 of product sales but if your postage is £15000 then your total turnover is £85000 taking you over the threshold.
Another consideration is whether you sell secondhand goods as you would then be eligible for the “margin scheme” and pay VAT on the difference between what you buy in at and what you sell out at. For example a car dealer buys in a secondhand car at £5000 and sells it for £6000. VAT is paid on the £1000 difference = £200 at 20%.
We registered from 01/01/2013 as we were doing the same – keeping sales down to keep below the threshold – and it was starting to hurt us.
We’re targeting doing £100,000 in the next financial year so after sitting down and doing the sums it was worthwhile.
Also, you should be aware that in your first VAT return you can reclaim the VAT paid on any stock you hold on the day of registration, in my case this is about £20k worth of stock, so we’ll get a decent refund in the first instance.
There are also items that are Zero Rated such as Books and many printed items(but not all). One of my sales lines is Calendars and some are VAT rated and some Zero Rated(I have never really understood the differance so I just follow the lead of the Publisher of the particular Calendar-If they charge me VAT then I charge my customers if they do not then I don’t).
In regard to Good Accountants I can remember years ago supplying a load of Books Wholesale to one customer only for their Accountant to reject the Invoice because I had not charged VAT. It was a Book invoice and of course no VAT but he was a Chartered Accountant and did not realise this. However it was soon sorted out. However as he had been their Accountant for several years I wondered how many other Book Invoices he had rejected and had those suppliers then invoiced him with VAT just to keep him happy!
In my first year of trading my sales have hit in excess of £110,000 which has been a bit of a surprise.
As I sell 50% of my collectables outside the EU (and buy a lot of stock outside the EU too), the HMRC initally said that I was outside the scope of VAT and wouldn’t have to register.
After taking proper advice, it seems that all my turnover regardless is counted towards the threshold, so I had to register.
I am now signed-up for the “global” VAT scheme which is designed for goods selling under £500 and allows for the fact that I buy joblots abroad and from the public to re-sell.
This means I can offset my bought stock versus my VAT liability – indeed my accountant says as long as I have loads of stock I probably won’t have to pay anything in the forseeable future.
I had a vote on it and have decided that the accountant can do the returns as the rules for “global” VAT are a tad complex!
Also remember VAT is chargeable on Postage charged, even though it is Zero Rated at source [depending on the RM service used, of course].
You may buy it zero rated, but when registered you have to charge VAT on it & any extra part for the ‘packing part’ of the P&P.
Consider this when charging P&P, 99p P&P become £1.19p.
Legally of course if you are not registered, then VAT you pay on purchases cannot be claimed/charged to the buyer neither.
We registered back in February 2011.
One of our competitors selling similar items to us, is not VAT registered. By using Terapeak I have been able to calculate that his eBay turnover in 2012 was £60,000, but he also sells on amazon, so it’s likely to be a lot more.
The £60K eBay figure does not include postage so one can suppose that he should be VAT registered, but is not.
As he continues to undercut us whenever we’re both selling the same item, I have had no choice but to phone HMRC with detailed information on his business, turnover etc. I can’t wait and see what happens.
There are many sellers on ebay who are selling well over the threshold but dont supply vat invoices, i recently emailed one such sellers (who is selling around 4000 items a month) to ask if he was VAT registered, i got no response, so says it all really..
I wander when HMRC will level the playing field
bugger all will happen, you and the world phone HMRC everyday, their swampewd with snitches,
does anyone know
of any prosecutions or tax recovered from anyone at all ? as a result of their very own high profile focus of online traders?
its everyones duty to pay all taxes due to the revenue not just starbucks lol
I faced a similar situation around 5 years ago, and opted to stop working for 3 months, to ensure I dropped back under the threshold. In hindsight it was a good decision. I was already working all hours of the night and day, and couldn’t afford to increase my work load to make it profitable. With time, my eBay sales have dropped and dropped, and these days I am a million miles from hitting any kind of threshold.
Whilst I could do with more cash in my pocket (especially having two young kids) luckily I have no mortgage and prefer having more time free, and enjoying life a little more even if it means living on the bread line.
I’m all for paying taxes, but look at how big companies deal with such matter. Business goal is to pay as little tax as possible but keep everything legal.
So maybe other seller split their sales between two family members / or two companies, whatever works :).
Before anybody does anything like splitting their business in 2 and trying to get around VAT like that may I suggest that they have a long talk to their Solicitor. Ever since VAT was invented there have been bright ideas of splitting businesses in 2 or indeed many other small bits to try to get around VAT. The Courts have been full of them and they have all lost.
If a business is genuinely split between 2 family members there may be a case. However again CONSULT YOUR SOLICITOR BEFORE YOU DO ANYTHING. No doubt there are rules and the most obvious is that they have to be 2 totally separate businesses. Not just the same business trading under 2 names.
The HMRC has met just about every alternative on numerous occassions. So be careful if you are trying something “Clever”.
We’ve are at the cusp of the VAT threshold and have given this some serious thought. Having spoken to other sole traders and our accountant we took the decision that we’d have to be doing around £150k per annum to gain any real benefit.
I agree with other posters that the government need to address this and either raise the limit or perhaps have a staggered VAT liability similar to personal income tax.
Thank you Tamebay for having articles like this, it’s interesting to read other traders’ opinions.
Various posters have mentioned the need of the UK Government to make changes to the way that VAT operates. I seem to remember that VAT was introduced by order of Brussels and the EU. All that the UK Government can adjust is such as the rates and I seem to remember that even these have to be cleared with Brussels(don’t I remember that rates can go up but if the UK Government wanted to reduce rates that Brussels has to OK it-and I suspect that they would not). So I suspect that any hope of Osborne making any major changes are just not going to happen.
Sheesh, are you suggesting that we’re no longer a sovereign nation able to make our own tax laws? ;-)
When did that happen?
It started when we joined the Common Market and we have continued to lose(yet more of) our Independence every time that a Government signed yet another Treaty with the EU that gave up yet more of our Freedoms. Now this Government is talking(not very convincingly) about regaining some of our rights from Europe. They are even talking about a Referendum(but only at some vague time in the future). What is really needed is to regain our Self Determination in other words to get out of the EU and stop having to pay(through the nose) for its failures.
“our Independence”. “our Freedoms”, “our rights”, “our Self Determination” it’s all just nonsense. Do you think you (Chris, the trainspotter, from Cornwall) would have any more the aforementioned if we were not in the EU? Your buying into a myth of somthing that never was and never will be. Leave the EU and reality will hit home – Just a small island off Europe with a bit of history and a shrinking economy.
Trainspotter? I thought that we had decided that as I was only a “Trainspotter” for a few years between 1960 and 1964 that even the most juvenile posters can now stop trying to be clever(which they obviously are not) by using this “insult”.
As you know in my history(and a lot more recent that my having been a “Trainspotter”). I have been a Parliamentary Candidate, Elected Member of a Political Parties National Executive, Chairman of a Constituency etc and I am currently an Elected Councillor. So while I have not got all the answers(Nobody has) I am not just a “Retired” Trainspotter.
In regard to Europe have you noticed that the 2 most prosperous Countries in Western Europe are Norway and Switzerland and have you also noticed that they have something else in common. NEITHER ARE IN THE EU.
Perhaps this is significant?
I have heard all the rubbish about Britain being a small insignificant island off the coast of Europe many times before. I would point out that neither Norway or Switzerland are huge counties.
However Britain has long been the same size and located in the same place and it has not historically been held back because of this.
Chris, you have never been one to let facts get in the way of making a point: http://business.financialpost.com/2012/11/05/u-s-slips-out-of-top-10-most-prosperous-countries-while-canada-keeps-no-6-ranking/
Your comment is just steam, as per usual.
Having read your item I find myself wondering exactly what point you were trying to make. I said that the 2 most prosperous countries in Western Europe are Norway and Switzerland and your item says that they are. So rather than being a tool to critisise me it actually confirms my earlier posting.
If you look you will see that in the “overall prosperity measure” Denmark (EU) is number 2, Sweden (EU) is number 3, and Holland (EU) is number 8. If your just looking at the economy in most lists 3 or 4 of the nations are EU members.
I suspect that the measure comes under the heading of Lies, Damn Lies and Statistics. As an example there is the category “Personal Freedom” where Norway is number 6 and Switzerland is 22. I find myself wondering just how this category is Judged and Marked. Then of course the resulting rating is included into the overall category. Again Social Capital with Norway at 1 and Switzerland at 11. Again I find myself wondering just how this is judged.
Also I find myself wondering just what the difference in scores is between the various countries and their respective positions.
Yet I talked about “prosperous”. This really means the Economy and in those categories Switzerland is 1 and Norway is 2.
Now you are trying to prove that the EU is at the top of the tree. Yet it has a currency(The Euro) that has been on the point of collapse for several years. Various Statements have recently been made that all that is behind it. However does anybody really believe this? All it needs is for Greece, Spain, Ireland, Portugal or even France to go pear shaped again and the whole pack of cards will come tumbling down.
You mentioned Holland and there have been doubts about its economy. So I would have very real reservations about any set of statistics that has EU countries to the fore. In case you start to quote economists may I remind you that there is a saying about if you get a dozen Economists in a room you end up with 13 different opinions.
Economics is not an exact science. It is at best educated guesswork. However the Economy bit of the chart is probably based upon something that can be accurately measured rather than guessed at. So I am happy to stick by my original statement. Also when(it certainly is not if) the Euro goes belly up ALL the Countries currently in the EU, including the UK(even though we are not a part of the Eurozone) will suffer a massive economic shock. Some countries such as Norway and Switzerland will also suffer a shock but probably of a very much lesser degree. Certainly the shock that Norway and Switzerland will suffer will be survivable while the Eurozone countries will probably be an economic disaster zone for a generation(at least)
I’m not trying to prove anything. Just noting that as usual you are highly opinionated but unsubstantiated. You were the one who actuality brought forward the idea of trying to justify a position with statistics with your “In regard to Europe have you noticed that the 2 most prosperous Countries in Western Europe are Norway and Switzerland and have you also noticed that they have something else in common. NEITHER ARE IN THE EU.” comment
On a VAT non-related subject, has anyone else noticed that when you contact eBay customer services for help regarding a problematic buyer, if they actually help you, then later on you get an email asking you to complete a survey regarding the customer service that you have received.
However, if they do not actually give you help and do not resolve your problem, you don’t get the survey request. Funny that isn’t it.
Growth in the right way always pays off.