By Debbie Hancock, Owner of the Business Money Coach: empowering business owners to build a life they desire.
When running a business, we encounter many obstacles. Initially, we wear all the hats and make every decision. One significant obstacle which can impact business owners’ growth is the VAT Threshold (just increased to £90k) in the UK. Once businesses reach £90,000 turnover, they must register for VAT and charge their customers VAT, collect the VAT and pay it to HMRC.
This process can initially appear daunting due to the technical aspects of VAT, such as determined how much to charge and completing the returns and payments to HMRC. However, another obstacle looms large, particularly for many women in business—the emotional and mindset aspects of VAT registration. Questions flood in, and uncertainty looms, leading some to play it safe and keep their businesses small. The business owner may lack the knowledge, feel intimidated by potential outcomes or fear the answers.
Concerns such as “I cannot increase my prices”, “what will my clients think”, “will I lose a lot of money?” often arise.
What is money mindset?
Money mindset is a set of beliefs, habits and emotions that have develop from childhood and influence the decisions we make regarding money, wealth and ourselves. Regardless of whether someone grew up more affluent or less well off, everyone has their own stories and beliefs around money which impacts the decision-making process.
We absorb these beliefs from various sources such as our parents’ behaviour with money, watching films, and listening to stereotypes about money. For example, how frequently do we see rich women in films depicted as hard and unkind until she realises the error of he ways and gives up her riches? It is not surprising that some women are scared to increase their prices and expand their wealth.
We have all heard the sayings:
“Money doesn’t grow on trees”
“You have to work hard to make money”
“Look after the pennies and the pounds will look after themselves”
“Rich people are greedy”
These sayings, whether helpful or not, influence our decisions.
How does Money Mindset impact VAT Registration?
Many female business owners dread losing clients by raising prices to accommodate a 20% VAT increase. They worry about their client’s perception and therefore feel obligated to absorb the increased cost and reduce their profit margin opting to remain below the £90k VAT threshold, viewing it as the safest and easiest option to avoid upsetting anyone.
Yet, this cautious approach significantly constrains the future growth potential of the business. What will happen in when inflation escalates costs, yet they are unable to increase their prices?
With the VAT threshold stagnant since 2017, the recent increase to £90k marks the first adjustment in seven years, failing to keep pace with inflation, further squeezing profitability.
Is registering for VAT worth it?
Monitoring sales (turnover) as you approach the VAT threshold (£90k income) is crucial, as it will determine if VAT registration is necessary and influence the decisions in your business regarding prices and potential investments.
Registering for VAT upon reaching the threshold is not optional, however you do have the choice to voluntarily register for VAT earlier. This option allows you to reclaim any VAT on costs if you are on standard rate VAT. Additionally, if you have incurred significant initial costs, this could result in a cash refund from HMRC initially, aiding cash management.
When do you need to register for VAT?
You must register for VAT if:
- your total VATable turnover for the last 12 months exceeded £90,000 (the VAT threshold)
- you anticipate your turnover to go over £90,000 in the next 30 days
Understanding your relationship with money
Understanding your money mindset is pivotal, you need to bring awareness to it. Otherwise your emotions and stories may drive your business decisions, potentially harming growth and profitability. By becoming aware of your mindset and working on creating a more positive money mindset, you will notice a shift in the decisions you make, along with an increase in your confidence in handling financial matters.
Regarding VAT registration, remember increasing prices to accommodate VAT and reclaiming VATable costs can reduce financial pressures and enable business growth.
To start this process, ask yourself these questions:
- What did you learn about money growing up?
- What is your earliest memory of money?
- How does the prospect of increasing your prices by 20% to account for the VAT make you feel?
- What has stopped you from registering for VAT?
- If you choose not to register for VAT and remain below £90k turnover, how will this decision impact your future?
Even as a Financial Coach, the VAT threshold remains a consideration for me. It’s undeniable that its new, and it’s uncertain how clients will react or whether there will be a short-term impact on profit. However, the long-term effects are undeniable; with no further VAT threshold to surpass, the possibilities are limitless.
Consider the case of a female Pilates studio owner was found herself hoovering around the £83k mark (at the time when the VAT threshold was £85k). She was deliberately not increasing her prices, offering additional classes and generally held her business back due to the fear of VAT registration. Her accountant had advised her to stop selling to remain under the threshold which was restrictive advice that failed to consider the business’s growth potential and the owner’s personal wealth goals.
The Pilates business owner had dreams of building the business; she had room to increase prices, and she had visions for a bigger business. Upon evaluation of the potential impact of a price increase on memeber retention , she realised it wouldn’t be significant and she had a waiting list of members eager to join. She subsquently moved locations, far surpassing the VAT threshold, and built a business she adores. The fear of the VAT threshold had hindered her from maximising profits her business and building something she enjoys.
Ask yourself if you are limiting your full potential by avoiding VAT registration.
Your next step
Ensure you monitor your income (turnover) regularly, on a rolling 12-month basis, to avoid exceeding the limit (£90k at the time of writing) without proper planning. As you approach the threshold, decide which scheme you want to adopt (consult your accountant) and gather the necessary information for registration. Then, consider the extent to which to raise your prices and how to communicate this change to your customers. Providing them with advance notice will allow them to prepare for the increased cost. Make sure to retain all VAT receipts for costs so you can claim them and review past costs to include them in the inital return.
Remember, the VAT threshold may be artifically holding back your business growth. If you forecast that your business can acheive income of £110k or more, then registering for VAT is key. Once you surpass the threshold, you will witness business growth and you will wonder what you were worried about. Imagine what business potential is awaiting if you make that jump.
Best of luck for the future growth and success of your business. Happy International Womens Day.
