So, what is the impact of VAT registration on your business.  That is what I am looking at in podcast episode 127 of I Hate Numbers. There will be changes, and in the words of Charles F. Kettering “People are very open-minded about new things, as long as they're exactly like the old ones.”

So, what changes when you become VAT registered?

🍨Mindset change - you’re now an unpaid tax collector, no salary or fringe benefits

🍨Pricing conversations and decisions to be had, unless you want a declining bank balance and lost custom

🍨Profitability, not a dirty word, no profit, no business

🍨Processes and procedures will change, or rather they need to

Overview of VAT

Sweet and sour, ice cream and toothache, pleasure and pain is what it feels like for many businesses once they become VAT registered.

VAT, and dealing with it feels like one of the biggest business brain squeezes and changes for business owners once they join the exclusive (?) club of 2.7 million VAT registered businesses.

If you’re a VAT newbie, it can be daunting – It’s important to understand what changes you will face. Even seasoned members of the VAT club feel that they need that occasional lie down.

Conclusion

So, if you’re feeling a bit of pain and pleasure when it comes to VAT registration, don’t worry, you’re not alone. Millions of businesses go through the same thing. In this episode we chat about what you can do to make the process a little less daunting and help you get your head around VAT. We also answer some of your questions so be sure to listen in for more information. And remember, if you need any help with registering for VAT or anything else related to your business finances, our team is here to support you every step of the way.

Check this link to learn more about financial statements.  I invite you to join my Numbers Know How Financial Story Plan Community. I’d love to have you there!

Check out my I Hate Numbers YouTube channel,  Subscribe to I Hate Numbers now so you don’t miss an episode.  My book, I Hate Numbers will change your relationship with numbers and money, in a good way.  Check out what people have said, buy the book and make your own mind up, you won’t be disappointed.

There are approximately 2.7 million unpaid tax collectors in the UK alone, and their job, their responsibility, are to be tax collectors. More specifically, when it comes to VAT. For a number of businesses, VAT will pass them by. They will not not be involved. But as your business grows, as your business prospers, it's likely that you're going to enter that exclusive club. And by exclusive, we're talking about 2.7 million people, 2.7 million businesses.

That's a lot of businesses. For those who become VAT registered for the first time, or even those who have been in it for a while, it can be a real head scratching, a real perplexing moment of what to actually do. In this podcast, I'm going to be going through the four key changes that you'll experience, the four key changes that you need to experience and relook at if you are to be successful and not to let VAT get on top of it.

You're listening to the I Hate Numbers podcast with Mahmood Reza. The I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. My name is Mahmood. I'm an accountant, educator, and author of the book I Hate Numbers. In my weekly podcast of I Hate Numbers, my mission is to help you deal with the battle that goes on between your ears, make sure you win more than you lose, increase your financial awareness and help you and your business make more money, save tax and time. Pretty good ambition if I say so myself. Let's crack on with the podcast.

Now there are four key areas that a business owner will have to deal with. Be aware of when it comes to VAT registration time. Now, before we dive into those four key things, it's always worth remembering that you as a business owner, have a responsibility and an obligation to keep an eye, a track on what you're selling. Not only to keep an eye on what you're selling, but the value of what you're selling. Typically, if you have a turnover that exceeds a certain level over a rolling twelve month period, then you have to become registered for VAT within 30 days of that time.

So if you've sold goods or services at the current threshold level up to £80,000, then you don't have to worry about VAT registered. As soon as that pops into 85,000, then you have to register accordingly. Now this podcast isn't really talking about the registration process. Check out the show notes and I'll give you some links to what you need to do in terms of the formality. But once you become part of the VAT family, the four responsibilities, the four key areas then come to play.

The first thing is the mindset in your approach and whole attitude about VAT. Many businesses I've met over 30 years of being in business come to look at VAT and they shrug their shoulders, a slight tremor comes across them and they don't like it. They will do what they can to avoid getting wrapped up and getting involved in VAT. That can be understandable. However, if that's the direction your business is going and you have to register for VAT, I would embrace it as a positive thing.

It's an indication that your business is doing well. It's an indication that you're generating more turnover, more sales, and hopefully you're making more profit as well. So that should be taken as a mark, an indicator of some success. The second thing that will change is your role and responsibility. And your responsibility now changes to become an unpaid tax collector. Your job role, without any holiday, without any salary being offered, no incentives, is to make sure you comply with the rules and regulations, to make sure you collect that money from your customers, pay to your suppliers and then pay the tax offices, HMRC, typically once every three months, money that's owed to them.

Or you may even get some money coming back to you. But you're a tax collector and that money does not belong to you. So it's important to make sure that any VAT that you're collecting is put away separately in a separate bank account and it comes out of your main banking system. It doesn't belong to you, don't consider it to be yours. If you spend it and don't have it, when it comes time to pay HMRC, you will be in big problems and HMRC will not look too kindly on that.

So think about separating out those funds, putting them into a separate account. Typically apply a flat percentage depending on what your business activity is. So it says every time I invoice generates sales of £1000, I put a certain percentage away to cover the VAT. You are an unpaid tax collector. We're going to talk more about processes towards the end, but the whole mindset shift has to come into play. The next thing to consider, ideally before you get to that stage of having to register, you need to have a plan of attack, of how you're going to deal with this is when it comes to pricing your products and services.

Typically the first thing we need to think about is what's the nature? Who are we selling our services and products to? Now, assuming your items are subject to VAT, assuming that what you sell, what you provide has VAT added on, there are two main considerations. First thing you need to consider is what are your customers? I want to say what are they? I don't mean their names. Are they what are called consumers? Are they themselves not registered for VAT? Typically, they could be other self employed businesses, they could be charities or they could be individuals.

So perhaps if you put a service business like a plumbing or a builder’s merchant, then your customers are likely to be individuals. So if you're selling B2C, as it would be called, then you've got a challenge on your hands. More of that in the moment. If you're providing your products or services to other registered businesses, to a large extent the pricing challenge becomes less so. Let me explain why that would be.

Now, if you're charging, let's say, £100 for your goods and services and your customer happens to be another business, then if you want to maintain the same level of profitability, if you want to make sure that you're not losing out financially, then all you will do is add 20% to the value of your invoice. It will make no difference to your customer. They will be able to claim that money back and therefore it's neutral. If anything, you're likely to make more profits by doing B2B if you've become VAT registered compared to not having been registered in the first place. Now, if your customers are non VAT registered, then any products you sell to them, any services you provide to them, you either have to add 20% to your price, which automatically means you will become more expensive to them.

Your client will not be able to compensate for that extra 20% high, and therefore your service or products will be much more expensive. It may be that it's a good opportunity to revisit your pricing, but that's what the first reality will be. You can either absorb the pain yourself, you don't wish to change your pricing structure. What that will mean at worse is that within that £100, there's a component of VAT that you have to take out and paint over to the government. Approximately on £100 worth of sales, that's going to be about £17 approximately of VAT that you have to take out and pay over. So your profitability will suffer, and that's less money that you get to keep.

The third option could be is to share the pain. You pass some of that on to your client, you absorb some of that yourself, and therefore you progress slowly to getting to your pricing, to where you want it to be. Now, pricing is a complex area. Check the show notes, and I'll put a link in there for a link to a podcast episode on pricing that you'll be worthwhile to check out. But pricing certainly needs to be addressed. It may be an opportunity for you to review your current pricing. You may decide to move away from your current client base, you may decide to carry on, and you may decide that your value is by putting your prices up.

But be aware, those customers could walk. The third thing is the profitability. Profitability is effectively the difference between what you're selling to a customer to a client without VAT being included. Take off the appropriate costs. Again, those will be excluding VAT. Now, the difference represents your profit2. Now, if you're doing B2B, you'll typically find that overall profitability goes up. You certainly will pay more tax, but your profitability will increase. If you're doing B2C, profitability could dip if you don't address the pricing conversation as early as possible.

Now, the final thing to consider, and we've spoken about mindset changes, seeing VAT as a marker of success, putting yourself in the role as an unpaid tax collector, we talked about the pricing conversation that you need to have with yourself and your clients. You're looking at the profitability that's going on. Lastly is the processes. Now, certainly your mind needs to be more focused on making sure you've got a good effective recordkeeping system. In the climate that we have in the UK at the moment. Your VAT return will have to be submitted digitally via something called making VAT digital. You need to make sure you've got a good cloud system in place.

You need to make sure you understand the rules and regulations for when it comes to working out VAT and what needs to go on the documentation as well. Again, folks, I'll leave you a link in the show notes to direct you towards some additional resources. Now, that's a good thing, I think, for being VAT registered, because it means your mind has to be focused on not only having a good data capture system, but you also will have the hallmarks of a good reporting system as well. So making those decisions, planning for your business going forward, all those essential things you need to do will now be much easier because you've got good processes.

You certainly need to be more circumspect, you certainly need to be more careful on the invoices that you receive. You need to make sure if you are, for example, claiming back VAT, all the requisite information is included on the document, typically VAT number, typically the description of the goods and services, and typically a breakdown. Again, the purpose of this podcast is not to go through the rules and regulations, but to make you aware that things will have to change and things should be changing. So folks, let's wrap up with what we've got.

We're talking about mindset changes, we're talking about the pricing conversation that you need to have with yourself and your clients and your customers. You need to consider the impact on profitability. You need to think about the changes in processes that you need to cope with the change becoming VAT registered. It may sound quite top heavy and scary, but once you've gone through the process, make sure your current accountant or adviser is helping a long way away. Life will be much simpler going forward.

Yes, you've gone into another league, yes, you've got into a different bracket in terms of earnings, but we should hopefully see better prosperity for you going forward. Folks, I hope you got some value from this podcast, and if you have, I'd love it, not only for you to subscribe, but perhaps to share that with folks and friends that you know. I'd love it if you could leave a review, some feedback, so I can get the opportunity to share this with more people. Folks, until next week, happy VATing.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.