Ask a small businesses providing services to the public if they would like to be VAT registered and you will struggle to find a yes.
Why? Because selling to the public, who can't reclaim VAT, will create a very difficult commercial situation. Either you become 20% more expensive overnight and potentially lose customers to cheaper competitors, or you keep your prices the same and make a smaller profit on each job. Not really a choice you want to make.
This can create the situation where businesses are determined to trade below the VAT registration threshold. With careful planning this can be achieved and mandatory VAT registration can be avoided. However with bad advice and poor planning not only will mandatory VAT registration not be avoided but the registration deadline could be missed, with a VAT liability building up over a long period of time, a financial ticking timebomb.
Agent or principle is one example of where good advice and planning are essential. If acting as an agent for another, the business turnover for VAT purposes is only the margin made by the agent. So for example an agent acting for a celebrity charges a commission of 10%. They could handle the invoicing for the client on a job of say £10,000. When looking at the agents turnover for VAT registration it would only be their commission of £1,000.
For a principle they act in a different capacity and are responsible for the entire arrangement. Even though their intention may always have been to subcontract out all the work, the full amount invoiced to the end customer would be counted towards their turnover for VAT registration.
The key danger then is incorrectly considering a business to be an agent when really it is a principle.
Given the tax at stake or the impact on the business would be considerable, a careful review of all the facts is essential. The contracts in place should accurately reflect how the business is operated.
If you would like to discuss how WB Accountant can assist you with VAT compliance please give us a call or send a message.
