If you are struggling with the thought of VAT registration, you need to read this.
Perhaps you have a fear of losing clients if you have to put your prices up 20%, or you simply don’t know how to approach the whole situation.
You can become VAT registered at any time, but businesses only have to pay VAT once their annual turnover reaches a certain threshold (currently at £85,000 in the UK). A point in your business growth that should be celebrated as you are now officially adding value to the economy, and you are well on your way to achieving that 6-figure status. But unless you registered for VAT right at the start of your business journey, this growth milestone is guaranteed to trip the majority of business owners up, especially if you are selling to consumers, who can’t claim the VAT back.
What ought to be a pragmatic, logical decision, becoming VAT registered can quickly become an emotional storm of over-thinking.
In today’s article, I want to highlight the possible stories you may be telling yourself (stories that probably not true … but affect your decision making), highlight the three choices you have over when to get VAT registered, and then give you a number of possible opportunities for you to move forward so your business growth doesn’t plateau.
First off, I want to share my VAT registration journey because I got stuck here for almost two years. I was finally forced to register for VAT on 1st April 2016 but not getting VAT registered when I set up my second coaching business in 2013 has probably been the only business decision I’ve ever regretted.
If I’d treated it as part of setting up a new limited company back then, I wouldn’t have had to deal with the painful two year experience of waiting until I was forced to register; registering only when I reached the threshold, and not before. When I started my first coaching business, CanDoCanBe, in September 2004, charging VAT wasn’t even part of my thought process. I wanted to keep things simple and my money goals back then were far lower. I was selling to other business owners but most of them weren’t VAT registered themselves.
Over the years, my business grew, but just as I thought about taking my income seriously, I lost my Dad after 18 months of cancer. My business took a back seat and I barely made a profit during those two years. When I came back to work in September 2010, all I could do was to focus on building up my business again … registering for VAT wasn’t on the radar.
By 2014, I had rebranded and started my second business, Karen Skidmore Ltd, and I had found myself getting close to the VAT threshold quite quickly. Although I had been working with various mentors at the time, technically I had all the support to create and build new revenue streams and raise my game. But somehow I never really upped my game sufficiently enough.
The looming VAT threshold had created a number of stories in my head.
I was experiencing the Big VAT Ceiling.
For two years, my business revenue came in at just under the VAT threshold; I couldn’t have worked any harder to have stayed in the same spot!
Having spoken and worked with many business owners at this level of their business, it turned out that I wasn’t alone. The stories I was telling myself about what it meant to be VAT registered, were the same as many others.
The VAT Stories That We Tell Ourselves
We all have stories running around in our heads, particularly around money and pricing. Stories about why certain people buy from us; how certain marketing campaigns work, and others don’t; how much you think people will be prepared to pay you.
These stories aren’t necessarily true or false, but are based around our beliefs and what we’ve seen, heard and experienced. When we are unsure or emotionally connected to an outcome (ie “I have to make the sale to prove that I am good at what I do”), we make what happens (or doesn’t happen) mean something to us. These stories are just assumptions, and never really based on what’s really going on.
Making the decision when to register VAT creates the perfect conditions for such stories, assumptions and over-thinking. Here were the three stories that I had running around my own VAT registration. Which ones do you relate to?
1. My clients won’t pay VAT as so few of them are registered themselves.
If you are selling to consumers, rather than organisations who can claim the VAT back, charging an extra 20% on your prices can feel an enormous hike.
When I was struggling with this, my clients were business owners, but very few of them were VAT registered themselves. I just couldn’t get my head around increasing my fees by 20%, knowing that they couldn’t claim this back.
But VAT is part of our everyday lives. We may not like paying it, but we know we have to pay it. If VAT was included in prices, then we often don’t blink an eye. It’s when you choose to buy, get excited about buying, go to the checkout and then be told “Oh, that’s another 20% please” … that’s when, as consumers, we can decide that something may become too expensive because the price suddenly changes at the last moment.
2. I hate finances – I want to keep things simple.
I love simplicity. But using simple as an excuse not to understand the stuff that would help me shift my business forward, was … well frankly … a crap excuse.
I am never going to try to convince anyone that VAT is simple but as I learnt, you don’t have to be a VAT specialist to get VAT set up. That’s why you have a trusted accountant who you take advice from, and move on.
Plus you really can’t go wrong by reading through the clear steps outlined on the gov.uk website. You just need to make the time to sit down quietly and go through each section.
3. I’m going to lose clients if I put my prices up.
Similar to story number one, but this story threw up all the insecurities I had about my prices. Pricing is one of the biggest mental exhaustions for business owners, especially for those of you who are selling your time and expertise.
Charging VAT immediately puts up your prices by 20% which may well be the biggest jump you’ve ever had to make since starting your business. So it’s no surprise that bubbling up to the VAT threshold throws up all sorts of over-thinking and worries.
Making the VAT registration decision
Registering for VAT is simple compliance. However, if you’re playing emotional head games and you start believing the stories you are telling yourself, you are going to stay stuck here at this revenue ceiling for many years.
There are three choices you can take with your VAT registration.
Choice 1: Do everything possible to NOT have to register for VAT
I hear of business owners wanting to create multiple businesses, so that they trade different products and services through different businesses. I went through this thought process myself. Legally, there are ways of being able to do this; speak to a good accountant and I’m sure you can find all the right loopholes to allow you to do this.
But, what an absolute over-complication of a very simple problem.
The mindset here is coming from a place of scarcity; of restricting how you operate, which in turn can close down all opportunities for future growth. Yes, there may be good reasons why this could work for you, but what if you are faced with the same problem again in a year or two when your separate businesses all start to bubble under the VAT threshold again?!
I’m all for tax efficiency and only paying what you owe, but if you make this choice, it’s like running a race by always looking over your shoulder at your competitors behind you.
Choice 2: Wait until you reach the threshold and you have to register for VAT
This was the choice that I made, and boy did it create stress at the time. For the few months leading up to this point, I was constantly checking to make sure I wasn’t going to get caught out. Always be seeking counsel from your accountant at this point because there are some hefty fines and potential back payments to be made if you decide to ignore this.
At the month we realised that VAT registration was inevitable, I had to quickly put together a letter explaining the situation to my clients that they would be paying an extra 20% the following month. In the end, I handled it all OK, but I created so much stress for myself. I know, looking back, that this was a big distraction and stopping me from working on future growth plans. Registering for VAT not only turned out to be a painless process, but my business revenue went happily up once I had removed the self-imposed ceiling to my business growth. I was no longer tripping up over all the VAT stories I had been telling myself.
Choice 3: Play the long game and take control over when you are registering for VAT
This is the choice I wished I had made; knowing that I was going to have to register for VAT at some point in the next year, I ought to have picked a date in the future and planned my business growth strategy and marketing campaigns around it.
Here are some of the opportunities that you may have:
- Plan the VAT around your next price increase. All good businesses increase their prices at some point; to not only keep up with inflation and market rates, but also how you are positioning yourself and the clients you are attracting more of.
- If you are working with consumers who can’t claim the VAT back, make your prices VAT inclusive; you don’t need to make the fact that you are now VAT registered a big story so don’t overcomplicate the buying decisions your clients have to make.
- You could take the other approach and make the fact that you are now VAT registered a celebration; it’s a sign of your success and the fact that you are now contributing value to the economy. Choose your messaging carefully though, as your clients have to feel part of your success, rather than now feel they’ve been negatively affected.
- Announce price increases well in advance; I’d recommend between 3 and 6 months. The more notice your clients have, the less likely they will have a grievance with you. They will appreciate your communication and professionalism.
- Increase your prices for new clients only and take the VAT hit with your existing clients. This approach needs to be worked out carefully, making sure you can afford to do this, but grandfathering your existing clients (the provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases) could be a smart move to keep your client base loyal, and a thank you for supporting you over the past few years.
Depending on your business model and marketplace, you may have other ideas. The important thing to remember though is when you are able to take control of when you become VAT registered, suddenly you have an amazing opportunity to step up your business to the next level of growth.
If you’ve been struggling with the thought of VAT registration and the fear of losing clients by having to put your prices up, how has this landed with you? Your personal beliefs around money create a lot of energy – positive and negative – around what you take action on to grow your income potential. And VAT registration can be a big emotional trap for many business owners, so you are not alone.
I’d love to know your thoughts. Please leave a comment below.
Until next time, do less, be more, play bigger.