Those 3 letters – VAT – strike dread through the hearts and minds of many small business owners. Like it or not, as your business grows there is likely to come a point when you HAVE TO register. But how do you go about adjusting prices when registering for VAT?
If your customers are other vat registered businesses, then this will probably have little impact – in fact, you may have missed a good opportunity by not registering sooner.
But if your customers are the general public or non-vat registered businesses, then registering for vat will mean your pricing has to change. I can hear you shouting – “I can’t charge my customers 20% more, they will go elsewhere!”
Planning for change
If you know your business numbers, or have a good accountant to keep you informed, then you will have a good idea that you are moving towards compulsory registration. Now is the time to plan for change.
What steps can you take?
Well, I’ll give you three: –
- Face reality! – You are going to have to register, you may not like it, but it is the law! Do not try to come up with grand schemes to avoid it. Actually, you can avoid it by not growing and keeping your turnover below the threshold. For some business owners, happy with their income and life/work balance, this is a real option.
- Start working on your options for registration. There are several different schemes available when registering. Working out which one is best will make a difference.
- Understand your competitors pricing, it will give you a reasonable idea of where your pricing should be.
Adjusting your prices - Is a 20% price rise inevitable?
No – but an adjustment to either your pricing structure or your profitability is.
Different vat schemes offer different options for your business. This is why it is important to assess your options.
With the standard vat scheme, you will be able to recover vat you pay on any purchases and expenses. This reduces your costs, which in turn allows for a reduction in your selling price. Yes, it will probably still mean your overall price will rise, but not by 20%.
With a flat rate scheme, you only pay a set percentage of vat to HMRC. Although you still charge the customer 20%, you do not pay all of this to HMRC. Again, this provides scope for your business to absorb some of the vat charge. The rate you pay depends on your type of business.
Which scheme is best?
This all depends on your individual business, your customers, your prices, your costs and your bookkeeping capability. Whilst I may be biased – getting help with this will benefit you.
Stay positive
I won’t disguise the issue, vat is a bit of a pain, and it will mean some changes are required.
But for a positive spin. Reaching the vat threshold is proof that your small business is growing, and that represents success!
It is an important decision to get right, so if you need help with vat and pricing book a discovery call with me.
