VAT can be such a crappy tax for small businesses selling their services to the public.
Here’s an example for you:
Jack is a wedding photographer with sales in the last 12 months of just under £81,000 (the current. VAT registration limit).
He knows he can do more jobs – but then he’ll need to register for VAT.
So, what sales does he need to make to make it worth being VAT registered?
If Jack was on the VAT Flat Rate Scheme he’d owe 11%* of his sales as VAT.
That means if he had sales of £91,000 he’d owe VAT of £10,010 leaving him with just under £81,000. Back where he started.
So, Jack has to increase his sales from £81,000 to £91,000 just to earn the same amount of money. And if he doesn’t make the £91,000 he’ll actually be worse off.
Looking at it another way…Jack is paying 100% in tax on his earnings between £81,000 and £91,000.
What are Jack’s options?
1. Stay under the VAT threshold…chill out…enjoy life…go snowboarding
2. Go for it! Blast through the £91,000 barrier and never look back!
3. Look at whether there’s any legitimate ways to split the business into separate businesses – each below the VAT threshold. Jack couldn’t just do this to avoid the VAT problem though.
If you’re faced with this sort of problem then get in touch.
*11% is the rate for photography. I’ve ignored the 1% first year discount for this example.
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