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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4082
Experience:  FCCA FCMA CGMA ACIS
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I am a small business (pre school dance franchise). I have

Customer Question

I am a small business (pre school dance franchise). I have been running years and have quite a high turnover compared to profit (currently 12 months rolling 64K turnover and I take around 15% profit). I have grown my business quite a bit over the last few months and have realised that although I do not plan to grow further, in another 6 months or so due to the recent growth my rolling 12 months will dip in and out of just going over 81k so some months it will be 78, some 84, some 79 and so on. I am trying to understand how VAT will work . I don't really pay any VAT to anyone currently as my outgoings are basically teacher wages and hall hire which is usually hiring from church halls so they do not charge vat. There are a few of my halls that do charge me vat but nothing significant at all, say £20 a week at the most. So I am looking at my business and thinking that if I have to register , I will be paying 20% of say 84k rolling 12 months which means that this will cost me around 16k yet my profit will be around 15k so my vat will cancel all profit and cost me 1k. I am not sure if I am missing something here? Is this how VAT works, BANG, you hit the rolling 81 and you are in it and you pay 20%? If this is the case then I need to close some of my classes and stay under threshold but this to me seems ridiculous. how can any small business who will just operate at 80/90k and say 20% profit operate as they must also have this problem? Or is it because I don't have any VAT to claim back from anywhere? I can't add the 20% to my classes cost as this will make me too expensive compared to the competition and if I reduce my prices to then add the VAT, well this obviously kills me to! Would there be any use in going ltd and adding a partner and can I even do this as a franchise? Is there a way to claim a refund as I will be paying more than I earn?! Really stuck and would appreciate some help.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
, I'm Keith and happy to help you with your question.
You are most unfortunately in a cleft stick, well and truly caught by Benjamin Franklin's dictum that in life there are but two certainties, death and taxes! If your turnover approaches or reaches the VAT threshold, currently 81K in a rolling 12 month period, you must register . You will then have to charge VAT on your sales. Now in essence VAT is relatively simple. The VAT you charge is called output tax and the VAT you pay on supplies and services is input tax. Every quarter you make a VAT Return on line, the VAT Form 100 to HMRC and the difference between the outputs and the inputs is settled either way.
Your problem is that if you breach the threshold you must meet the output tax yourself as your customers will not bear the added 20% to your charges. Furthermore, you have little or no input tax to reclaim so your solution is not to breach the threshold. Not particularly helpful. Taking on a partner will not work as it is the partnership which will be taxed not the individual.
Using a limited company will not work either, but operating two of such enterprises and splitting the activities would. However your activities would be exposed to Corporation Tax (CT) in the companies and to extract income you would almost certainly have to pay yourself a salary through PAYE which would mean having to meet the employer's element of National Insurance. The company could make contributions on your behalf to a Private Pension Scheme up to the annual limit of 40K which would be set against CT. You would also be involved in extensive book keeping and record retention to boot. You could contract this out, but at a piece.
You may just have to bite the bullet and restrict activities.
I am so sorry to have to impart such gloomy news. You may have hit a glass ceiling. Think yourself lucky you are not in Germany where the turnover threshold is one euro!
Customer: replied 2 years ago.

Thanks I think my solution is to restrict activities and look at cost savings to increase profit while at the same time getting a part time job as an employee too too as this business does not take me a lot of time to run! Thanks help.

Expert:  bigduckontax replied 2 years ago.
Delighted to have been of assistance.
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Expert:  bigduckontax replied 2 years ago.
Thank you support.