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Now more than ever business owners need to plan ahead
If you run a business , especially one that had to close during lockdown , you could be forgiven for thinking you ’ re in for a year of reduced turnover and lower profits .
But as accountants we are finding this perception among our clients doesn ’ t always match the reality . In fact , when you dig down , the figures reveal a different story . In many cases , just because income has fluctuated – with peaks and troughs caused by Covid-related closures – this doesn ’ t mean it has necessarily decreased . Government Covid grants and loans are further clouding the situation , by bringing additional income which makes the figures harder to interpret . For example , grants such as the one-off £ 10,000 available for small businesses with premises , and the Self- Employment Income Support Scheme for sole traders and partners may result in larger than usual tax bills falling due next year . This could be at a time when cashflow is tight and all business support has ended .
Understanding your level of turnover is especially important if your business is not VAT registered but may be heading for the £ 85,000 registration threshold .
It is important to accurately predict when the VAT threshold will be reached , in order to apply for registration in time . And here ’ s a further aggravating factor : HMRC has been taking far longer than its headline 30 days to undertake the registration process . The result is that firms not applying in time are going over the VAT threshold – which is calculated on a rolling 12 months of turnover – and experiencing a delay in receiving their number .
Trading while over the VAT threshold , but without a VAT number , is problematic , because the VAT owing still has to be paid to HMRC . One option is for businesses , once they have a VAT number , to issue VAT only invoices to their clients , so claiming the tax retrospectively , which is not an ideal situation to be in .
This may be effective when invoicing other VAT registered businesses , which can in turn recoup the VAT in their own returns . However , consumers or non VAT registered business are unlikely to agree to pay backdated VAT . The VAT still has to be paid , so may end up coming out of the business ’ s profits . Alternatively , they could issue a gross invoice , adding a note to say a VAT invoice will follow when the registration number is confirmed but , again this brings complications .
Equally , there is a risk that businesses may consider deregistering because , at first glance , it looks like they may have gone under the £ 85,000 threshold . A word of caution here : the VAT is repayable for any stock or assets held by the business on the date of deregistering ( over a threshold of £ 6,000 including VAT ). So for example , if you purchased a van whilst VAT registered , by deregistering you may have to pay back some of that VAT . Becoming VAT liable also means a business needs to submit VAT returns via the Making Tax Digital ( MTD ) system for each quarter , which itself needs to be registered for , and an MTD compatible software used .
For example , at Optimum we have a client who runs a salon . The business closed during the Covid lockdowns , but once reopened pent-up demand created a rush of customers , so income has been erratic . Add to this the Government assistance , which although is not VAT-able income , has muddied the view of the actual turnover and performance of the company . On a rolling 12 months , the turnover has gone over the VAT threshold and the owner has needed to register for VAT .
This illustrates the importance of preparing well in advance , by careful business planning , and predicting future profits , so that the point where it will be necessary to register for VAT can be pinpointed in advance , and an application is made in good time .
Michael Blaken
ACCOUNTS DIRECTOR
If you ’ d like some advice about business planning , VAT and Making Tax Digital , contact me , by emailing : mblaken @ optps . co . uk , call 01793 538 198 or visit : www . optps . co . uk
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