Growing turnover and profits is the aim for most businesses. However, for a small business there is a tricky time when their turnover approaches the VAT Threshold.
Effectively any small business that enjoys success and sees their annual turnover go over £85,000 will have to pay VAT. This means the business will have to cope with a substantial increase in costs. This will usually have to be passed on to their customers by way of increased prices, which can then result in a severe loss of customers and cash flow problems.
What is the VAT Threshold?
The VAT threshold determines whether your business must be registered for VAT.
If the turnover of your business exceeds £85,000, or you know that it will, then you are liable to pay VAT. The VAT taxable turnover is essentially the total of everything sold that is not VAT exempt.
You must register for VAT if you expect the turnover of your business to be more than £85,000 in the next 30-day period, or if your turnover has already exceeded this amount in the last 12 months.
How can this impact your business and customers?
If you’ve registered for VAT, your business will need to adhere to certain obligations such as submitting regular VAT returns.
Registering for VAT also means you’ll need to charge your customers VAT, which will cause issues if those customers don’t want to pay the increased prices. If your customers are VAT registered then this won’t be much of an issue, as they will be able to claim it back on their VAT returns.
However, when customers aren’t VAT registered, such as private individuals or businesses that have exempt sales, they can’t reclaim the VAT. This means that your goods and services will effectively become 20% more expensive for them.
This sudden increase in costs can result in a loss of clients, cash flow problems and a risk of insolvency.
What happens if you can’t pay the VAT owed?
If your business cannot pay the VAT it owes, there are options available to you.
When HMRC believes that your business has a realistic chance of paying what it owes in a reasonable amount of time, they can allow you pay your arrears through a series of monthly instalments. This is referred to as a Time to Pay (TTP) arrangement, and usually lasts no more than 12 months.
However, if your businesses can’t pay its VAT bill, then you need to get professional advice as soon as possible – from your Accountant and / or a Licensed Insolvency Practitioner. They will be able to assess your situation and advise you on the best option for you to take.
There is a range of options, including:
- Liaising (informally) with your creditors to give you some breathing space
- a Company Voluntary Arrangement (CVA)
- a Creditors’ Voluntary Liquidation (CVL)
- a pre-pack Administration
- doing nothing – although this is not an option we’d suggest
The best option for you and your business will depend on your particular situation.
Clarke Bell will give you free and confidential advice – so you can determine what is your best option.
Contact us now on 0161 907 4044 or [email protected] and one of our friendly team will help you.