The current threshold for compulsory VAT registration is taxable turnover of £85,000 in the last 12 months. This is a rolling measurement – if you look at the year to 30 June and you are under, that’s fine. However, you then need to review for the year to 31 July, and so on. Note the test is on turnover, not profit. This can be unfair if your industry has low margins and you need volume sales to make a profit.
Being VAT registered can be a problem for some businesses. Typically it’s businesses who supply members of the public or customers who cannot claim their VAT back. It effectively makes these businesses 20 per cent more expensive than their non VAT registered competitors. There is a silver lining. If you are VAT registered, you can reclaim input VAT (ie the VAT you’ve paid to your suppliers).
But if your prices are driven by the market, your ultimate cost may be lost business or lost margin. So how can you avoid being VAT registered?
Tips to Avoid Being VAT Registered
Here are entirely legal ways that businesses use to legitimately reduce turnover:
- Get your customer to buy materials. This is a common practice with builders. Typically, if a builder buys materials for a job, he then invoices the customer for something that he doesn’t necessarily make a lot of profit on. If he simply puts any profit from materials onto the labour element and asks his customers to buy the materials themselves, it will reduce his turnover. He therefore makes the same profit but with a lower turnover.
- Close your business for part of the week. This seems mad in the sense that it is counter-intuitive to growing a business. However the effect on profitability can be significant. This scenario is common to many businesses. A good example is takeaways. They supply hot food (on which they must charge VAT) but with very little input VAT to reclaim. The difference between being VAT registered and not being VAT registered can be as high as £12,000, so closing for one lunchtime to keep your turnover down and avoid breaching the threshold starts to make sense.
- Ignore large one-off contracts. When determining whether your turnover has gone over the threshold, the legislation allows you to ignore large contracts or pieces of work that are one-off in nature and not part of your normal work pattern. This is obviously subjective, but if you can show that, say, your normal level of sales is £60,000 and it was boosted by a one-shot deal worth £15,000 that isn’t the kind of work you normally do (and won’t do again), then you can avoid having to register.
- Your business has significantly changed. We recently argued this successfully for a client whose turnover had just gone over the threshold, but who had also lost a member of staff who wasn’t going to be replaced. This reduced the capacity – and future turnover – to a lower level.
Finally, beware the common myth that every time you get near the VAT registration threshold you can avoid registering for VAT by simply starting a new company, so that each company’s turnover is magically below the threshold. It doesn’t work – when considering the turnover, HM Revenue & Customs use an anti-avoidance measure and add together all the income from a trade even when it is split between entities.
Some of the specific examples above are industry-specific, but the principles can be applied to other areas, so it’s worth thinking about.
This blog first appeared on the Tax Donut website in September 2011.
Blog updated March 2018