The idea of taxes shouldn’t stop you from putting up your prices. And neither should it keep you from growing your business. I’m a firm believer that you shouldn’t let tax or accounting dictate how you run your business. You should consider it, but it shouldn’t be the main driver behind how you run your business.
You shouldn’t be playing small by keeping yourself under the VAT limit. In the UK, the VAT limit is £85,000, and once you get to that level, you have to charge VAT on all your sales. It does mean you can claim back some VAT, but it often means in a service-based business that you will also be paying VAT.
Many people don’t want to be VAT registered as it’s seen as a bit of a pain. That’s not a reason not to do it! You shouldn’t be limiting your business growth to that £85,000 threshold and having to put 20% on everything. You should be preparing for it once you get to the £70,000 mark. You should be thinking about how you might manage the price rises that go with being VAT registered.
VAT is not a tiered system, and it starts from the date you register. So you have to be careful about what you do and how you do it. Get yourself an accountant to help you do that. But you must keep an eye on when you might get to the threshold.
Also, look at who your customers are and if they’re VAT registered. You can then see if it will make any difference to them. If they’re VAT registered themselves, your VAT status won’t make any difference, as they can get the VAT back anyway. If your clients are not registered, and you mainly deal with consumers of various small businesses, you need to consider your next move. Think about whether you can put your prices up now and if that may result in you losing a couple of clients. And also, think about how you might manage that further along the line.
My view is that you let them know the prices are going up, as you now have to become VAT registered. But it’s entirely up to you what you do.
Generally, it’s making sure that you don’t think about the tax and VAT as a reason not to do something. It’s tempting to think you don’t want your business to be very big, so you’ll just play it small. As Denise Duffield Thomas always reminds us, paying tax is a good thing. You are contributing to society if you are paying more Corporation tax and more Income tax. You’re helping to give back to services like the NHS - and you may just need those services at some point.
So do consider that when you’re thinking about avoiding the personal allowance threshold or the 40% tax threshold. Stop playing small and get rid of those money blocks so that you can grow your business and those thresholds don’t come upon you as a shock. Monitor your numbers and know when you’re going to hit the VAT threshold or the 40% tax threshold so you know where you are in your business.
It will affect pricing because lots of people want to see prices that include VAT. With my online courses and things that people generally buy online, they want the VAT inclusive price. If I’m dealing with business to business, they’re not so bothered; they’re very happy for me to quote £100 plus VAT. Whereas online, they would prefer to see a £120 price ticket - mainly because the people buying online are not VAT registered and cannot claim back the VAT.
Think about whether being VAT registered is something you might need to do in the future and think about the timing of it. You’ll also need to make sure you’ve got an accountant to help you do it. Don’t try and do VAT stuff yourself if you don’t know how to do it. You’ll need an accounting system, and it won’t be long until Making Tax Digital is compulsory and you’ll have to submit it online.
And know that once you get up and running, it’s all very straightforward. You just need to have someone who knows what they’re doing with VAT, otherwise, it will get very, very messy!
Listen more to my podcast on taxes and pricing.
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The Pricing Queen podcast is produced by Decibelle Creative