Everything is going great for Bob; the year is booking up nicely and the enquiries are still trickling in, it’s shaping up to be Bob’s best year yet. Nice work Bob. Bob is aware of the VAT registration threshold (Turnover over £85k – 2018/19) although as his April to April turnover is looking to be around the £63k mark he doesn’t give it much more of a thought.
That’s a mistake there Bob.
HMRC consider whether or not you have gone over the registration threshold based on a 12 month rolling basis, rather than just the 12 months prior to your tax return date. You’d be surprised, especially when you take the seasonality of the wedding industry and thus wedding photography into consideration, how much variance there can be between April to April, and say November to November.
Tracking and forecasting your monthly turnover is a must, and super easy really – we’ve made it even easier with the free downloadable VAT Bat tracker.
Bob downloaded our VAT Bat and realises that his Oct-Oct turnover is teetering on the edge of £85k – a’la VAT registration. Good job Bob knew this in advance, as let’s face it, it’s called tax planning and not tax retro-planning for a reason!
Empowered with the information Bob has 2 choices. Chill. Stay under the VAT threshold. Don’t take any more work in. Take a holiday!
Or, option 2. SMASH IT!
If you choose the latter you have a choice of 2 further options, register for standard VAT, or register for Flat Rate VAT. With standard VAT you charge your customers, and owe HMRC the standard VAT rate of 20% on your revenue, and you may reclaim any VAT you’ve paid on business-related goods or services. (new Sonys for example)
The second option is flat rate VAT. Each industry is allocated it’s own percentage for flat rate VAT which is owed on turnover (not profit!), which for photography is 11% (1% discount on your first year of registration, woop-de-doo).
When you’re enrolled on this scheme you can’t claim back the VAT on purchases (except for certain capital assets over £2,000). Secondly you still actually charge your customers 20% VAT (or include it in your fees) and keep the 9% difference between the 20% you charge and the 11% you pay. Great for corporate jobs where the client is going to claim the VAT back on your invoice so doesn’t care how much the VAT is, but not so great for consumer clients, like wedding couples, who naturally can’t claim the VAT back, so they inevitably can just see it as an additional 20% to shell out. That said, they’ll be seeing that 20% extra a lot on invoices for bigger purchases such as marquee’s, venues and food.
So when we say SMASH IT, you really have to smash it, because if say you just ‘gently break it’ and turn over £96,000 say, once you’ve paid your VAT of £10,560 (11% fixed rate) on those sales you’re back where you started under the registration threshold. Earning more, working more, but taking home the same, or possibly less.
Anything over that tipping point (£96,000) is where you start to make extra profit; if it’s ‘worth it’ or not is down to how much you can comfortably turnover above the threshold traded off against personal opinion and workload.
It’s our understanding that more people choose to avoid the threshold rather than tackle it, what are your thoughts?
Download our simple to use, and 100% free, excel VAT BAT TRACKER here.
Photo by Sam Truong Dan
This is simply our understanding of the rules and thus nothing here should be taken as financial advice, we are not accountants or tax advisers and you should perform your own research and seek professional advice if required.