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.
33 Responses
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!
“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!
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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.
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 :).
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.
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.