Keep under the VAT threshold

published 19 September 2008

Small British firms try to avoid VAT registration, and you can see why, says The Schmidt Report. If your customers are mainly members of the public, you become far more costly once your turnover exceeds £67,000, the point at which you have to register for VAT. Adding 17.5% to your prices usually means either your customers go elsewhere, or you have to drop your prices. In practice, this means £1 in extra turnover can end up costing your bottom line up to about £10,000.

A loophole to avoid this is the technique of business splitting. Every person or company in business has its own VAT registration threshold. So if a husband and wife run a pub, the husband, typically, is VAT-registered for 'wet sales', while the wife runs the 'separate' business of doing the food. You do need to split the businesses properly (eg, keep separate sets of accounts; have different premises, if possible; invoice for proportions of shared overheads, etc). But even if the VAT man knocks your scheme on its head, he can't act retrospectively, so you "are still likely to have got away with it for a period".