Michael Blaken
ADVERTISING FEATURE
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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