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The VAT Problem

Current vat regs state that if your turnover exceeds £81000 (that's turnover not profit alas) then you must register for vat.
This means that all your prices increase by 20%.Whilst this may be acceptable for commercial contracts,most of whom will claim/offset vat,domestic customers will obviously not be happy at such a large increase.
Would it not be possible,once you have exceeded the vat threshold, to set up a separate company purely for commercial contracts so avoiding having to charge domestics the extra tax?
We are currently over 95% commercial contracts and have been vat registered for several years so am asking this out of general interest and not as a tax wheeze!

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  • Ask your accountant!

    If you get this wrong, it's a big mistake. General rule-of-thumb is that if you've thought of a loophole, the chances are the IR might have seen it before.....

  • PRO

    Artificial seperation of companies to evade VAT is an offence. There are very very strict guidelines for the few cases this can be done.

    If the businesses share a common director or premises or equipment or trades then it will be seen as evasion as far I understood it.

    Paul's advice is good and stands. Talk to a professional. HMRC (esp VAT) are not known for their accommodating ' nature' ;-)

    From VAT Guide:

    6.5 What if I have separated my business into smaller parts?

    Where a business has been artificially separated into smaller parts and this separation results in the avoidance of VAT, we have power to direct that the persons running these activities be treated as a single taxable person and registered for VAT. For further information see the list of Statements of Practice on our website.

    You have the right to appeal to an independent tribunal against the issue of such a direction (see Section 28)."

  • It is not all prices that would increase. It would only be your labour charges. All materials will have been exposed to vat at point of purchase. Therefore, on a £10k contract, assuming 60% materials & 40% labour, the difference would only be £800 between a registered contractor and non- registered contractor. I accept that that could be enough to swing a client, but I have found that a lot of clients seem to trust a company which has a higher turnover, thus vat registered, with a larger contract and vice versa.
  • PRO

    Ian raises a good point, typically the price increases need only be around 15-18% for a services based business (like gardening) as you can still claim some costs as input VAT.

    For a Landscaper supplying a mix of services and products, it can be around 10-12% increase in going VAT reg.

    Of course, it all does depend on your operating costs and how you pass these on.

  • Hi Ian,

    Surely, if you are charging £10000 for a job, it's £10000 plus VAT to the client, regardless of materials/labour split? It would only change if the client was buying the materials himself through a company, claiming the VAT back, and the labour was with/without VAT?

    Either way, we're talking very small amounts here, not £10K contracts. It does make a huge difference when you go to quote on a garden that's worth, perhaps, £80 per month, and you are 20% more expensive before you even put the price in.

    Gary put it a bit more bluntly that me: it's going to be fraud to set up a separate company that isn't really separate! I think you just have to accept that we small traders capture the non-VAT market, and if you grow the business larger you have to lose some smaller contracts to us. :-)

  • VAT on private maintenance will put you at a disadvantage to those non registered as the cost is mainly labour. As has been mentioned above, it is illegal to split a company to keep you under the threshold. Don't mess with the VAT man, they are 'Customs and Excise' and have more powers than the police - apparently!

  • oh they do and a lot of their powers cant be questioned or appealed. used to work alongside them sometimes when I was in the police. Nice people to have on your side, not nice people to have against you!

  • You can go on the flat rate scheme which if you are doing garden maintenance, where your major costs are labour, the rate you pay Mr VAT man is just 12%, although you invoice customers for 20%. Once your turnover reaches 230k, you must leave the flat rate scheme and pay 20% to the tax man. Works for us. You only have to increase your prices a modest amount to restore your pre VAT profit level.

    If you are in landscaping this may not be suitable as you cannot claim back VAT on the flat rate scheme.

    You cannot separate parts of your business(es) to avoid VAT !

  • PRO

    We went VAT registered in December. At first I worried that it would make a big difference. But 4 months on and we are making bigger profits. However, one thing is for sure - our business has gone from a 50/50 split between landscaping and gardening to a 80% 20% split. Clients will pay VAT for landscaping projects. For regular maintenance they already perceive that we are going to be more expensive (not necessarily true though)and therefore we have less enquiries for that coming in.

  • PRO

    Also our accountant told us that if you are on the flat rate you can claim back VAT for capital purchases over £2000. We started on the flat rate (11% - 1% reduction in first year) and our accountant worked out we only saved £85 so we are now on the 20% rate.

    Also don't forget, similar to what Paul said, when you do your quotations/invoices the total amount is classed as your sales income so you have to pay VAT on the total price (even if that includes materials, labour, disposal etc) that the client pays you.

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