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Hitting the VAT threshold can lead to cashflow problems
18 May 2018
Category News & General

As counter-intuitive as it may sound, some small companies are getting into cashflow difficulties because their turnover has exceeded their expectations.

If your business’ VAT taxable turnover is over £85,000 then you must register for VAT with HM Revenue and Customs (HMRC). The website gives clear guidance on this matter, stating:

“You must register for VAT if:

  • your VAT taxable turnover is more than £85,000 (the ‘threshold’) in a 12 month period
  • you expect to go over the threshold in a single 30 day period”

Keeping an eye on turnover

Many companies complete quarterly or monthly accounting records, so they are able to keep a close eye on their revenues. In which case, they are likely to be fully aware of the state of their turnover.

However, there are a lot of companies – especially small and new start-up companies – which keep annual accounting records. It is those companies who can easily fall foul of creeping over the threshold without knowing it at the time. The company owners are too busy growing their business, and doing all the necessary work that involves, to be closely monitoring the growth of their turnover. New start-up firms often do not have an Accountant, as they are trying to keep their costs down. Even where they do have an Accountant, they may only have the minimum level of support – i.e. the annual recording of their accounts.

So, it is quite understandable how a company director can fail to notify HMRC that their company has exceeded the £85,000 threshold at the time that it does so.

The problems that can arise

Having increased the turnover to over £85,000 is a tremendous achievement – however, it is not always good news for a company.

For one thing, it means that the firm needs to charge VAT on its products and services (where applicable). At the current rate of VAT, this effectively means the company is increasing its prices by 20%. This is a huge increase and many customers will not be prepared to pay it. So, the result of an increase in turnover can be a reduction in clients.

Having exceeded the VAT threshold, the company will then need to pay HMRC the consequent taxes that are now due. There may also be a penalty applied because the company did not notify HMRC at the correct time that their turnover had exceeded the VAT threshold.

A small business is normally run on very tight margins, so it may well be that the company is not able to pay HMRC what it now owes – especially as it is a cost the company owners were not expecting to have to pay.

The types of businesses this would typically affect include hairdressers, couriers and food outlets…but it can affect any company,

At Clarke Bell, we have dealt with a number of companies who have run into serious cashflow problems as a direct result of exceeding the VAT threshold. In their situation, the only option that was available to them was to put their company into a Creditors’ Voluntary Liquidation (CVL).

What you should do now

If you think that your company’s turnover might exceed the £85,000 VAT threshold you should be very proud of yourself – but you should also make sure that you notify HMRC.

You can go to the website for more details on how to do this; or you should speak to your Accountant. (If you don’t have an Accountant, now would be a good time to get one.)

If it has already gone beyond that stage and you have been issued with VAT bills (and penalties) which the company cannot pay, then contact Clarke Bell now for your free advice.

We will discuss your situation with you, and work out the best option for you to take now.

Contact us now on 0161 907 4044 or [email protected]

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If you are worried about your business or just want a (free) no obligation chat, contact Clarke Bell on 0161 907 4044 or [email protected] today. Our Licensed Insolvency Practitioners will provide you with the best professional advice for your situation.

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