During the Spring Budget announcement, we were all watching with some astonishment as the Chancellor, Jeremy Hunt, made numerous changes to the way businesses are going to be taxed.
It was quite a divergence from the Autumn Statement at the end of last year when the Government made very few amendments that were relevant to businesses.
One of the key points, that the team and I pulled from the Budget, was the VAT threshold increase – from £85,000 to £90,000.
This adjustment not only influences the operational and administrative aspects of running a business but also calls into question your strategic approach to pricing and profit generation.
Business owners – and many of our clients – now face a tough decision: should they adjust their pricing strategies in response to the new VAT threshold?
I wanted to explore this with you, in a little more detail, with a focus on the technical considerations and strategic implications of either:
- Holding off on profits to remain below the threshold or…
- Opting for early registration to manage taxation more efficiently.
This is particularly important because the VAT registration threshold serves as a gauge for small-to-medium-sized enterprises (SMEs), determining when they must start collecting and remitting VAT on sales.
A higher threshold ostensibly offers SMEs the chance to increase their turnover before dealing with the complexities and obligations of VAT registration.
However, it also introduces a bit of a strategic conundrum regarding growth and pricing tactics.
A note on the ‘strategic pricing’ strategy
In essence, what we are looking at here is how staying below the threshold could temporarily offer you a competitive advantage in pricing, as your business would not need to charge VAT on its products or services.
However, this advantage might be short-lived if it stifles your growth opportunities.
Forecasting and scenario planning can help you work out if this strategy is for you and shed light on the potential impacts of the strategy on your business’s bottom line.
This involves modelling the financial outcomes of surpassing the VAT threshold versus maintaining a turnover just below it.
The benefits of early VAT registration, on the other hand, include the ability to reclaim VAT on business expenses and inputs.
This move can be advantageous for businesses with significant VAT-chargeable purchase costs, as it can improve cash flow and reduce overall tax liability – despite many of our client’s initial concerns of it being a burden.
Having said all of this, it’s important to remember that adjusting pricing strategies in response to VAT considerations requires a nuanced approach.
(It’s always best to discuss it with your accountant as well).
Businesses must consider the elasticity of demand for their products or services and how VAT inclusion might affect consumer behaviour.
Deciding whether to absorb VAT costs or pass them on to customers should align with the business’s overall strategy and customer expectations.
Considering long-term growth versus short-term gains is also a crucial factor.
The decision to stay below the VAT threshold might favour short-term gains over long-term objectives, for example.
You’ll need to contemplate your long-term goals and whether early VAT registration could facilitate broader market access and scalability.
Navigating compliance and tax efficiency
Now comes an equally tricky problem – compliance.
First, let me say that maintaining rigorous financial records is essential regardless of the chosen path.
Accurate and comprehensive financial documentation ensures readiness for VAT registration and aids in compliance when the threshold is reached.
I always recommend seeking professional guidance from tax advisers or accountants who can provide tailored advice based on your business’s specific circumstances.
We can help you navigate the complexities of VAT registration and pricing strategies effectively.
If you require further information on this subject or you’d like to speak to a tax expert about your VAT efficiency and compliance, please reach out to either myself, or the team.
Email me at robert@mooret.co.uk or call my office on 01945 465767
Alternatively, you can visit our contact page, here.