VAT

[Biskit]

Hi Guys,

 

Something which has caused me issues for a while...

 

I'm self-employed, and my annual turnover is well below the threshold for essential VAT registration. Having spoken to my accountant and others, the concensus is that VAT registration is a real pain, for which you don't get paid but have a lot of extra paperwork, accounting etc. So avoiding it is a good thing if you can.

 

So, when I invoice people I do not add VAT. This is generally fine as most of my clients are either small and not VAT registered themselves anyway, or I am invoicing them for services/hire on which they simply do not pay VAT, and do not claim it back, hence it makes no difference to either of us.

 

However, I have an issue with dry-sale items. Eg. if I buy some equiment from a supplier, I pay VAT on it and canot claim it back. If I sell this on to a client who is VAT registered, I have to charge them based on the full amount I paid (including VAT) plus a margin. As I can't VAT invoice them, they cannot claim back even the VAT I've paid, so my price is more expensive to them than it would otherwise be.

 

The only other option is to ask my supplier to put my client's name on the VAT invoice, then pass this on and get them to pay it and claim the VAT back, then I invoice them seperately for my 'margin'. Obviously this means they can see exactly what I'm marking things up by, and also they could simply go direct to my supplier next time.

 

Is there an accounting trick to get around this? Or is it simply a case of becoming a LTD company and being VAT registered?

 

Ben.

[richard]

First thing - you don't have to be a Ltd co to be VAT registered, you can still be self employed if you wish.

 

Secondly, it would obviously look rather strange for you to be double invoicing the client, by sending them the original invoice from the supplier, plus one for you. Some suppliers will allow you to become an agent for them, where they invoice the client and pass you a commission, but I don't know of many who do this in theatre, otherwise you are just stuck with the VAT problem - there isn't an easy solution as far as I know.

 

The thing to remember though is that while you are effectively adding 17.5% to the cost of your sale items to the larger companies who reclaim VAT, for those clients of yours who you supply labour and are not VAT registered, if you became VAT registered you would effectively add 17.5% to those bills, so it does work both ways!

[paulears]

Your accountant is making VAT sound a real pain. It isn't. You can do it on-line, and when you register, you are able to claim back the VAT you would have used as input tax for three years. If you make big purchases, and have the invoices then this can result in a hefty refund at the first VAT return time!

 

If you use an accounts package, most even calculate the VAT for you. You get an email from HMRC, you click the button on the accounts software and it gives you exactly the figures you need for the VAT man. Ten minutes later you can be on the net, enter the figures and click send. Done! They then tell you what you owe them, or they owe you. They give you a date and the money gets transferred on that day. The only other thing you get is a form in the post to detail any sales you have made to EU countries. You ignore this if you haven't made any EU sales.

 

It immediately makes you cheaper to VAT registered companies. It does mean you are at a disadvantage with domestic or non-VAT registered clients - you still give 17.5% of your invoice to the VAT man. What you need to do is always talk non-VAT prices, and quote your prices at £X plus VAT. People do accept this without too many grumps if they are not VAT registered.

 

Me - I opened a building society account just for the VAT and whenever people pay me, I put the VAT (which isn't mine) straight into this account. Because you set input and output VAT against each other, this means there is always more sitting in the account than I actually owe, leaving a surplus earning interest.

 

My accountant just adds up the four quarter's returns and checks them against what I paid compared to the accounts report. If they did the returns I'm sure it would take them ages and ages - which I'd be paying for.

 

My advice would be if more than 50% of your clients are VAT registered, go for it, and most of your supplies will be VATable, making it a workable system with little effort.

[Stuart91]

Is there an accounting trick to get around this? Or is it simply a case of becoming a LTD company and being VAT registered?

 

Is there another local(ish) company that you could collaborate with on the deals that are proving troublesome at the moment? You're more likely to be able to act as an agent for them than for a manufacturer or distributor.

 

Obviously it helps if you're not in direct competition with one another, e.g. if you're doing a job in a school but they tend to concentrate on the theatre etc.

 

This kind of approach can also be a useful way to gain access to product lines etc. that you wouldn't otherwise be able to offer competitively.

[Brian]

Your accountant is making VAT sound a real pain. It isn't.

Likewise. My accountants advice had a different slant. His theory was that if you're not VAT registered then people know your turnover must be less than the threshold making you very much a small company. If you register then they have no idea what your turnover is but the impression is that you are 'bigger'.

[Pete McCrea]

I'd echo Paulears, in that VAt ist as much of a pain as people make out. If using an accounting package. It's a case of entering each transaction in to (in our case) sage, then when we get the lovely green form, hitting the VAT return button, and copying the figures over, then making the online payment. Takes about 10 minutes.

 

That said we have no choice on being registered as we are well over the figures required of HMRC.

[Jivemaster]

If your "client base" is not vat registered then adding VAT to your bill adds 17.5% to their costs. If your typical client is registered then they get back input tax.

[adamharman]

As you say most of your clients are not VAT registered, and a lot of your invoices are for services and hire, presumably the dry sales are a fairly small proportion of turnover?

 

In which case, you're best bet is probably not to worry about it. Your "higher" prices for equipment may upset one or two VAT registered customers, but charging VAT on hire and services is just as likely to upset a few non VAT customers. You just have to go with whichever ones are the biggest and best customers.

 

My main business is building, mostly for private customers, so it obviously makes sense for me to avoid VAT. On big jobs I've sometimes got the customer to open their own account at the builders merchant and pay for materials direct to avoid taking me over the VAT threshold by putting it all through my books. Obviously I can't make any profit on materials that way, but I can charge a bit more per hour and still be cheaper than others who are vat registered. On smaller jobs where it all goes through my books, I can mark up materials as well, and I win both ways!

[JDP]

Secondly, it would obviously look rather strange for you to be double invoicing the client, by sending them the original invoice from the supplier, plus one for you. Some suppliers will allow you to become an agent for them, where they invoice the client and pass you a commission, but I don't know of many who do this in theatre, otherwise you are just stuck with the VAT problem - there isn't an easy solution as far as I know.

 

It seems a good idea, but looks VERY unprofessional.... and also the supplier is probably giving trade rates, and may not be happy to invoice your client, as its you who is technically the trade. Theres also the small matter of the client now knowing where you buy your supplies from, and they can easily buy from the supplier and cut you out. Also, NOBODY likes commission charges - and unless its pennies (which it would have to be as a commission charge, considering the client knows where to buy their stuff) and your not going to do that, because like many others, you will use the commission as part of our business profit.

 

A fair few installs buy direct to stop this kind of commission thing happening. I and many others see 'commission' as sitting doing nothing, so if you offer your item at a price including it, the client doesn't know that your making it, that and you can use your discount with your supplier to undercut list prices of other competitors, and keep a profit in, if that makes sense.. From decent suppliers, 40% is a pretty standard discount on mainstream items - you REALLY don't want to give that all away to your client, for more reasons than I can think...

 

I personally wouldn't be too happy about paying for items, then having a second invoice for £100 or so because someone made a call.

[indyld]

A lot of sense has been talked already about being registered for VAT even if your turnover is below the required threshold so I won't repeat that.

 

All of my clients are VAT registered so the extra invoice cost is irrelevant to them. I don't deal in large amounts of subhires or crew, so the VAT I pay on goods in most months is not huge.

 

I registered for VAT( partly after a request from some of my smaller VAT registered clients) and did detailed calculations each quarter and sent returns/cheques to the HMRC. Then I took a look at the small business flat rate scheme. If you are a sole trader who doesn't deal in a lot of VATable goods you are often financially better off, plus the flat rate scheme saves tons of calculation. It takes me about 5 minutes to complete my VAT return each quarter.

 

Take a look a the flat rate scheme to see if it suits you better. You might not make extra money using it but it might solve your VAT problems and saves accounting time.

[Biskit]

presumably the dry sales are a fairly small proportion of turnover?

 

In which case, you're best bet is probably not to worry about it. Your "higher" prices for equipment may upset one or two VAT registered customers, but charging VAT on hire and services is just as likely to upset a few non VAT customers. You just have to go with whichever ones are the biggest and best customers.

 

Thanks for all the replies so far. To be honest it was pretty much what I'd thought. I will have another word with my accountant about it all anyway. I suspect that the issue it would cause for my non-VAT clients (the majority) would more than offset any advantage I would gain by cheaper prices to the VAT clients.

 

To be honest, the problem has really arisen from one particular regular client. It is a children's dance school. Recently, they have been asking more and more for consumable effects like pyros, confetti cannons, smoke/bubble/snow fluid, and even stage dressing materials.

 

I advise them on all these things, and supply the required hardware etc to make it all work, so obviously I don't want to end up getting cut out of the supply chain. Most of my bill to them is always for the hire and service elements, but they obviously know I get the consumables from VAT registered suppliers, and they want to claim back every penny they can, so I get nagged and nagged for VAT invoices they can put through!

 

More of an annoyance than a financial cost.

 

Thanks again for the replies,

Ben.

[TonyMitchell]

We use Sage Line 50 software and the VAT return takes no more than 10 minutes once every 3 months.

There really is nothing complicated about it.

 

About half our customers are VAT registered, to whom we quote a price plus VAT.

To private individuals, whom we assume are not VAT registered, we quote a VAT inclusive price, but without highlighting the fact, as this may prompt some individuals to look for a non-VAT registered supplier.

 

Our sub contractors are not VAT registered, therefore HMRC get a nice five-figure cheque from us every 3 months, but at the end of the day it's law hence not optional!

 

Back to the original point, there shouldn't be all the VAT myths that exist out there, as it is so very simple in practice.

[Brian]

For info, I've just completed my quarterly VAT return. I do the whole thing in Excel as no software which I can afford handles the whole euro import/export thing properly. So I've added all invoices in and out to the spreadsheet, done all the exchange rate calculations and filled in the form. Total time = 53 minutes. And what's great is that this quarter they owe me money :D

[zonino]

The main "VAT is hell" myth comes from the more complex end of sales where some are rated at various different rates, exemptions etc etc, not so much a problem in this industry.

[gareth]

Just to chip in my two penn'orth ... back when I was freelancing, and trading as a limited company, I registered myself for VAT. With one or two minor exceptions, all of my clients were VAT registered themselves and could therefore write off the VAT that I charged them, and it was beneficial to me when I was buying in products and services. I filed my VAT return online every quarter, and because I kept detailed accounts on a spreadsheet (much to the delight of my accountant!) it was simply a matter of copying numbers from the spreadsheet into the online VAT form - the work of a few minutes.

 

I didn't have to register for VAT - my turnover was below the compulsory registration threshold - but I chose to, and I'm glad I did. However, just because it was right for me, isn't to say that it'll be right for everyone. Consult an accountant.