I’m really excited to bring this episode to you because we’re going to bust through a couple of myths about VAT, why it’s beneficial for you to consider going VAT registered even if perhaps you’re nowhere near that £85,000 threshold, and the importance of planning ahead. I’m interviewing Wendy Tetley, who is actually my own accountant. She runs an incredible practise called Achieving Clarity, and she is a charted management accountant; that’s pretty much like the highest you can get in the accountancy world.
Wendy’s also got a large HR background and is also a qualified business coach and change management specialist, so she understands the issues about growth in your business, making changes, and how to deal with those in the most practical way.
Wendy very much prides herself on being an active member of her local community. She lives in a beautiful part of the country, Whitstable, and she’s president at Whitstable & Chesterfield Rotary Club. I call her my human accountant because Wendy and her team are the first people that I have met that just talk my language. When you’re running your own business sometimes you’ve just got to find the right people to support you. Whether that’s with your virtual assistant, bookkeeper, or your accountant. I just knew last year that my accountant wasn’t the right accountant, and that’s nothing against him. It’s just that the way that he works wasn’t working for me in my business, and I needed some somebody else to come in with a different level of support.
So today we’re going to be busting through some myths about going VAT registered:
- When you should go VAT registered?
- What are some of the benefits of being VAT registered?
- How do you go about passing VAT costs onto your customers?
- What to consider?
- Is it worth you going VAT registered before you reach the threshold?
- What the threshold is
- Some of the mindset blocks around going VAT registered as a small business
Welcome Wendy, could you tell us a little bit about your business and how did you become an accountant in the first place?
I actually wanted to be a doctor. You know how it is when you’re that age, you’re too busy partying. I was offered placements but was one point down on my results. So I went back and re-did my A-levels but unfortunately didn’t get a second chance. So I did what we all do and tried lots of different things then somebody said to me ‘You should join the civil service.’ So I did. I went in as a manager and then about three months in – I worked for really amazing woman who was fast track, and she called me and said, have you ever thought about being an accountant? I hadn’t ever. She said they’re offering a bursary, why don’t you go for it. So I did, and I went along to The Treasury and was interviewed by this panel. I was very young, so felt very fortunate to be chosen to be given this bursary. I didn’t really know what it meant to be an accountant, but I’ve always loved learning, and so that’s how it all started.
Isn’t it interesting that of the people that I interview so many of us in the finance profession just kind of fall into it?
Yeah. I just don’t think it’s sold as something exciting when you’re younger. We did a secondary school open day because I’m really into trying to educate youngsters and give them career advice. I have to say we were probably the least talked to stall until we started offering them sweets! When we did get talking to them, it was really interesting because once you started to engage the teenagers and talk to them about the exciting things you can get involved in it opened their eyes a bit. I think everybody just associates accounting with Maths and who likes Maths?
Yeah, and it’s way more than numbers, isn’t it? I’m really excited to kind of get stuck into this topic today about VAT registration with you.
What would you say is one of the major challenges, particularly for small business owners, when they’re beginning to think about going VAT registered?
I think we’ve got about 300 clients now, and a lot of them fall into that category where it’s just them or maybe one or two other people that they work with. Quite a few from the construction industry, and paper is not their thing, so they worry usually about keeping good records. And of course if you’ve got the right sort of accountancy service and support, then we do that for a lot of our clients. And that’s what people should be asking of their accountants – what support they can get.
Most people have this block, particularly of a certain age group I find, and they’ve been told by their Uncle or their Dad that VAT is a terrible thing, it’s another tax that you have to pay. I was very surprised at how few people really understood the benefits that VAT registration could bring to you in a small business. So I think people worry about the paperwork, and also this misunderstanding that ‘Oh my God, I’m going to have another tax bill every quarter.’
Let’s dig into some of those. So first of all what is VAT?
VAT is a tax that you charge on your services and that you pay when you buy anything. So every time you fill up on petrol, one 6th of your bill is VAT. When you buy anything other than food and things like that then 1/6 of what you pay is VAT. The idea of being VAT registered is that you then charge your customers VAT. So you add 20% onto your sales. It looks like you’re getting a 20% rise, but of course you’re not. And VAT is paid over every quarter to HMRC.
That’s a really good point, because I think people think that VAT is another way for you to earn more money and it’s not, because that isn’t our money to keep – it’s money that then has to go out to HMRC as another tax. But it’s those taxes that provide us with the NHS system that we have today.
With the current Coronavirus situation and the pressure on the NHS, it’s these taxes that are used to benefit the overall economy. So why would we not want to pay taxes? And I think sometimes if we re-frame it that way, it can be quite useful and beneficial to think about it from that perspective.
I think that’s very true. I always look at it in terms of my client and how they are going to benefit. But yes, at the end of the day that is more money that’s going into the economy. I think the way to look at something like VAT is anybody who charges, whether it’s a garage who’s charging for petrol or whatever, you’re a custodian of that money. You’re almost taking that money off of individuals and looking after it to pass it over to the Treasury. And then the Treasury say “Thank you so much for looking after that for me. We’re going to let you keep a bit of it because you’ve been really good and have helped us collect some taxes.” That’s quite a simple way of looking at it. But I find that most people then go ‘oh okay, I get it!’ Because that’s the mistake people make; they think that if they’re VAT registered that’s their money. And then it does feel like somebody’s coming along and rapping on the door saying ‘Hey we need your VAT payment.’ In fact you didn’t have that money before you were VAT registered, this is additional.
Yeah, that’s a really good point. And certainly one of the areas I’ve seen when I’m working with female entrepreneurs in their businesses is that they don’t necessarily put that money aside. Even tax, they don’t put tax aside. And particularly when you’re a sole trader in the early years of your business, if you don’t necessarily know to put that to one side because no one has told you then it becomes problematic. Then when you’ve got to pay your tax bill as a sole trader, you’ve got to pay that tax in advance as well. If we haven’t put that money to one side, that’s when financially I see a lot of entrepreneurs struggling because then they have to use other methods, and that’s when the debt cycles traditionally start.
So certainly one of the things that we always talk about in The Money Circle membership, and we actually did a Profit First workshop just last week, which is this concept of mentally accounting and putting money aside for different purposes. And therefore if you’re running a business having a tax pot; and obviously, if you’re going to go VAT registered having a VAT pot, somewhere in a separate account where you could just automatically shimmy away a little bit of your income into that account. Out of sight, out of mind.
The worst case scenario if you put too much in your tax pot or your VAT pot, then you could just pay yourself a bonus!
Exactly. And then you never have that worry of oh my goodness, I’ve got to find that VAT. I do find that a lot of my clients do that, and they do sometimes use it to ease a bit of the cash flow because you get six weeks after the quarter ends – your VAT quarter – before you’ve got to pay the money to HMRC, so it can be used very sensibly to ease cash flow if needed. But you just have to make sure that you put it back in time to pay your tax or VAT bill.
Yeah, I could understand completely why businesses use that for cash flow. I think that the danger there, coming at it from a financial planning perspective, is that if you can’t replenish that pot, then you can get in trouble.
This is one of the reasons why I love the Profit First model, because it talks about paying yourself first and then you manage your business expenses after. So you’re kind of turning that traditional accounting model on its head.
So in terms of VAT registration, when should a business owner be thinking about going VAT registered?
I set up my business back in 2011 and the very first thing I did after registry was become VAT registered. Now that tells you something when the accountant becomes VAT registered quite quickly, because at the time I had one client and was making £5000 per year. So I was nowhere near the threshold, but it is free money. It is money that you’re able to keep in your business, and providing you’re cautious about how you manage that money, you do get a a little bit of payback and that money is yours. So I registered for VAT straight away.
You have to register when you know that your turnover – not profit – is going to exceed £85,000. That sounds like a lot of money, but don’t forget it’s not profit. So if you’re buying things to sell them, you could only profit £5000, but you could easily have a turnover of over £85,000. The other thing about turnover is it’s not what turnover is today, it’s what the turnover is for a 12 month rolling period. We have actually had clients that have been fined. We had somebody come to us who had £28,000 VAT bill and fine because HMRC said you should have registered earlier. They looked at it and said we’re going to assume that all your clients paid you VAT, and that comes to £28,000. Unfortunately this led them to bankruptcy because they couldn’t pay the bill. That was purely because the accountant they had at the time hadn’t actually reminded them and kept an eye on the fact that they were going to reach that £85,000 threshold.
So you’re looking at taking a forward forecast; am I going to come anywhere near £85,000 in the next 12 months? And it only takes one huge sale for that happen. You have to be VAT registered as soon as you think that’s going to happen. You should be speaking to your accountant because it actually makes a lot of sense for most people to be VAT registered. You transfer the VAT to your clients but you’re allowed to claim back the VAT you pay out. And that money is yours. So it always makes sense to be VAT registered unless you’ve got a very low cost business where you don’t pay out a lot of VAT.
Yeah, amazing. So there’s a couple of real golden nuggets you just shared there which I just want to break down a little bit further. You mentioned that it’s a 12 month rolling period of your turnover, not your profit.
Could you just explain the difference between turnover and profit?
So your turnover is your sales. So that’s your total sales. And your profit is once you’ve taken off all your expenses. Your premises, fuel, any stock etc. That’s your profit. And of course your profit could be much much lower than your turnover. So we have a client who’s turnover is about 1.5 million and in fact their profit is about £27,000 when they’ve paid out all their costs. So that’s why $£85,000 sounds a lot, but it isn’t.
That’s great. I wanted to clarify that because sometimes this jargon can just complicate people.
Is there a time frame that you when you hit that £85,000 you have to then go VAT registered?
No, you’re constantly forward looking. Once you hit that £85,000 you’re probably in a bit of a potential risk area, because you should have registered before you got near that. It’s good business practise to forward forecast. Let’s say that you’re looking to bring in £6-7000 a month in sales before paying any expenses, which is a huge figure once you look into it. If you’re looking to do that you’re going to, in a 12 month period, you’ll be close to that £85,000 which means that you need to register today, because you know in that 12 month period you’re probably going to hit that figure. You only have to have a really good month, as I’m sure most entrepreneurs will, and then you’re over that £85,000. It’s really important. That’s how that poor guy ended up in that trouble because he hadn’t looked forward, to see when he was going to hit it. He thought when you hit it that’s when you have to be registered. But that’s not true.
That’s a great myth to bust out of the water there!
How would somebody go about being VAT registered? What would be the process they would need to follow?
Well, you can speak to your accountant about it. But it’s not that complicated. You do it online, and for most of us, it’s extremely straightforward. HMRC can usually turn a VAT number around in about 7 days. There are certain things such as financial services that you can’t charge VAT for, but generally it’s quite a straightforward process.
You’ll need to know what your predicted turnover is, and you’ll need to show that you’re making what’s called taxable supplies. In other words, you are actually going to selling a service or goods which would normally come under tax and be VAT-able. As I say, there are some services and goods that aren’t, such as children’s clothing and food.
You also have to get something called a SIC code which is a code that you have to assign to your business, and is purely for management and accounting at a macro level nationally where they look to see how much is being earned in certain sectors.
Apart from that, it’s just the normal information. Word of warning: if you are a limited company and you are registered at another address like your accountants which I see a lot, that’s not the address that you put in for your VAT. You must give your place of business, even though that’s not what’s on Companies House. So my clients are registered at my business address but need to give the address of their warehouse or indeed the address of where they work from home, but that’s not made public.
Great. That’s a great tip.
So if someone has gone VAT registered, let’s talk about the benefits of being VAT registered. So you’ve already mentioned one of the big benefits is that if you have any expenses in your business and you’re paying VAT on those expenses, you can claim that VAT back.
Are there any other benefits of going VAT registered?
For a lot of people it’s a credibility thing. It’s that perception, it shows that you’ve arrived, that you’re somebody who is reliable, you’re being counted as it were. It generally has that impression for people.
I think you can underestimate how much VAT you do pay out. Most accountants will be VAT registered, so you will be able to claim back all the VAT on my very expensive bills! Fuel, mobile phone charges, home broadband if you’re using it for your business, all of that sort of thing. There’s a lot that people wouldn’t think about necessarily. But it’s the credibility issue for most. So that’s probably the two main things.
If you’re working for another business: so if you are a business to business supplier, then most people won’t be bothered about paying VAT because they’re just going to claim it back anyway. The time you may want to consider is if you’re selling to, I always say the lady down the street, because your price then might look like it’s 20% over inflated. The number of people that I’ve spoken to have been really concerned that by becoming VAT registered it was going to put them out of the market, or it was really going to lose them a lot of clients. And I absolutely can tell you, hand on my heart, that I’ve only had two people in all the time I’ve been doing this, that have come back and asked to de-register. And one of those if I’m honest with you, it was because he couldn’t manage the paperwork. He wasn’t organising himself properly, and he actually thought of it as another bill, another debt. But everybody else, they have no problem at all.
Yeah, And I’m really glad that you mentioned that because I think from a mindset perspective, this is a big one for a lot of entrepreneurs, including myself. I worried that a lot of people in my Money Circle membership are not VAT registered themselves. So how are they going to feel if I suddenly increase my prices by 20%? I really had to get my head around this. And I think this is relevant for a lot of people.
One of my recent master minders, who is also an accountant, went VAT registered recently and she had this fear that she was going to lose all her clients. She’s got 300 clients, and she lost one client. But she had a whole tonne of messages saying ‘Congratulations. This is great news for your business.’ So it’s also maybe an opportunity to weed out the clients that just aren’t the right clients for your business.
Yeah, 100%. Because I started VAT registered it didn’t really hit me or my clients, but I do hear this a lot. Because for clients who aren’t VAT registered it’s like this perceived 20% increase. But there’s plenty of things that you can do to mitigate that to some extent.
As an example, I’ve got a gardening company, a Dad and his son. They mow lawns and they they have some contracts with bigger businesses, and being VAT registered to those bigger businesses was fine. But they said the problem is, when we do the little old lady down the street, she can’t afford to spend another 20%. So I said to them maybe you don’t actually give her the full 20% and you take that as a cut to your profit. Right now you charge her £10 and when you’re VAT registered that will be £12. But actually maybe you continue to charge her £10 and that bit of VAT that you’ve got to pay on that comes out of your pocket. They said but then we’ll be worse off! No, of course not. Because you now can claim back the VAT on all of your fuel, of which they have a lot because they’re driving around, on your mobile phone, on your gardening equipment and tools, your van, all that sort of thing. And then they suddenly realised that this would work!
So what they did was they went away and they sent little notes to all their individual customers saying we are going to have to put our prices up very slightly now because we’re VAT registered, but just to let you know we’re not going to pass the whole increase onto you, we’re going to take some of it and we’re going to phase it in over 12 months. And they didn’t lose one client. So you do have options on how you do it.
Yeah, that that’s a lovely way to look at it. And I love the way that you helped them to communicate back to their clients. I love how you worked together in that scenario. The idea of doing that maybe over a phased period, if you are concerned about the impact it will have with your clients, is great.
Are there any other tips or anything that we’ve not covered so far in terms of going VAT registered or being VAT registered?
I get asked about cars and vans and things all the time. If you lease a car and use it privately, you can still get back 50% of the VAT on it. If you buy a new car or van and you only use it for business, you can claim back all of the VAT on it. So my clients who have vans, every couple of years swap in their van and get a nice £4-5000 VAT refund. Even if you’re paying for it over a period of time you can reclaim all the VAT in one go upfront even though you haven’t actually paid for the vehicle yet. So that’s quite useful.
Travel on trains and things isn’t VATable, so you can’t really claim that.
Using an Accountant
I always say to my clients, you can do your VAT return yourself, but ask your accountant what they’re going to charge you and as long as you make more than they’re going to charge you, then to be honest with you outsource it. You focus on doing what you’re good at, get your accountant to do it and you’re actually making money for not doing a great deal.
Put the Money Aside
Again, put that money aside. That’s the most important thing. There really is a misunderstanding that that money is a payrise for you, for your business, and of course it isn’t. You didn’t have that money before you were VAT registered.
Your First Year
When you first VAT register you can also go back six months of services you’ve paid VAT for and claim those back even though you weren’t VAT registered at the time. And you can back 4 years on assets. So if you bought a computer then you can reclaim the VAT on that computer, even if you bought it last year. So what it means is for a lot of people when they become registered to start with, they’re able to reclaim quite a lot of VAT. That can be a nice little cash flow because you can now reclaim all this VAT going backwards and very often that ends up in a rebate.
Lovely! It really is about forward planning and being prepared, and the more prepared you can be and these better conversations you can have with professionals like Wendy, or your existing accountant. Making sure you have these open and honest conversations and that your accountant can support you in a way that makes sense for your business.
Focus on what you’re good at. I think it’s just really important to find a team of people that you can work with, that being an accountant, a VA, or a bookkeeper that can just support you in a way that makes sense for your business.
That relationship is so important. In fact it’s the most important, I think, to getting your finances straight because a good accountant who you feel comfortable with – or a good provider of services because you’re absolutely right a bookkeeper could be equally as useful – but to have someone you can talk to, ask questions, you don’t feel foolish, there’s no judgement; I think that’s absolutely important.
Yeah, definitely. Thank you so much Wendy.
For those of you who are in The Money Circle membership we have Wendy coming in to deliver some training about tax this week. And if you are not yet in The Money Circle Membership, then you can grab your spot right now but only until Wednesday 1st April 2020 when we officially close the doors for this intake round.
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