The quarterly VAT bill.
It can literally be the death knell for some small businesses. The worst affected are those who deal with 'Joe public' rather than trading with other businesses in competitive sectors like retail and the trades.
Unlike VAT registered businesses, individuals cannot recover any VAT charged on to them so the VAT is just part of the price they pay. If the VAT registered business is competing with other businesses who are not VAT registered this makes things even more difficult.
Businesses on the cusp of the VAT registration threshold of £85,000 feel the pain the most. They don't quite have the volume or profit to be financially comfortable and they have the double whammy of charging and paying VAT and being less competitive.
Many are faced with the 'Hobson's choice' of keeping their businesses small and staying below the VAT registration threshold or going for growth and volume and dealing with the extra cost and administration of VAT
So how can small businesses manage the dreaded VAT and stay solvent and viable?
Well firstly they should investigate whether any of the special VAT schemes will help. There are retail schemes, a flat rate scheme, a cash accounting scheme and others. Choosing the right scheme can save on tax and also make administration simpler. Your accountant should be able to help you evaluate which scheme (if any) is best for you.
The next thing is to 'know your numbers'. I would strongly recommend modelling your business profits, allowing for VAT and ensure that you can achieve your desired profits and the business model 'stands up'.
What is not generally an option is to split your business into two or more smaller businesses to keep one or both of the businesses below the VAT threshold. HMRC would consider this to be an 'artificial separation of trade' if the purpose of splitting the businesses is to avoid paying VAT.
Examples of artificial separation could be:
- a pub which separates drinks and catering.
- a retail outlet which opens a smaller branch or branches but the branches have the same brand, ownership and resources.
- an entertainer with business (VAT registered) customers and non business (not VAT registered) customers.
If HMRC investigate a case of 'artificial separation' and the business is at fault the arrears of tax and penalties can be significant, not to mention the stress caused by a lengthy tax enquiry.
So there is no easy fix for the smallest businesses to deal with VAT
With care and planning it can be managed however and the most important factor is the underlying business model
VAT is just a cost of doing business.
The lazy or disorganised business owner will blame VAT for all their woes.
The savvy and proactive owner will accept that it is something which needs to be dealt with and adapt accordingly