Voluntary registration for VAT. Yes or no ?
This is part 9 in my series of blogs about wedding photography as a business – dream vs reality. You may wish to consider starting at part 1.
I thought I had finished at part 6 but I did mention that, if anyone had an issue they wanted my opinion on, to just drop me an email. I was asked about qualifications and awards, so parts 7 and 8 were born. Part 9 is to answer a question I have been asked about being VAT registered. What are the “pros” and “cons” around voluntary registration?
First, the usual disclaimer. I am not an accountant or qualified to give you financial or legal advice. The purpose of this blog is just to let you know about my decision making process and my personal experiences with voluntary registration for VAT.
In simple terms and generally speaking, when your taxable turnover goes over £85,000, or you KNOW your taxable turnover will go over £85,000, you are under a legal obligation to register for VAT. There are exemptions/conditions/further info which you can read about at https://www.gov.uk/vat-registration
Now my turnover has never exceeded £85,000 and, as I have never wanted to grow very big in business terms, is unlikely to. I prefer to stay “small”, maintain a healthy “work life balance” and have the time available to give my clients a very personal service. So why did I register for VAT ?
When I started out in this business I made a very considerable investment in professional grade equipment. Camera bodies, lenses, lighting, computers and so on. The simple fact that I could claim back the VAT on those “capital investment allowance” items meant I could claim back several thousand pounds from HM Revenue and Customs. This could have a great appeal, especially if your turnover in that first year is not what you were hoping for.
So the upside to “voluntary registration” is simply the fact that you can claim back the VAT on all items purchased for purely business purposes.
Another possible upside, though this is more debatable, is that some people consider a business that is VAT registered to be “more professional”, “more established” or maybe “more reliable” than one that isn’t.
As I said, this is debatable and I know that being VAT registered hasn’t made me any more “professional”, “established” or “reliable”. However the fact remains, some people appear to feel that way.
I have also had a few “corporate” commissions (parties and the like as I’m not a “corporate headshot” provider) where they wanted a photographer who was VAT registered.
So what’s the downside? The downside is, you become an unpaid tax collector for HM Revenue and Customs. Currently, you have to charge 20% VAT on all your goods and services and, after deducting the VAT paid out on items you have bought for your business, pay the balance every quarter to HM Revenue and Customs.
Personally I found the “refund” of VAT on my equipment purchases came in very handy indeed during my first year in business while I was trying to get established. However, from my second year of trading onwards, I have had a VAT bill to pay every 3 months!
Obviously, you know you are collecting VAT on all your transactions and that 20% of the fee you are collecting is not your money. It belongs to HMRC and you must put it to one side. It still feels like a bill to me though!
The other downside is, if your customers are looking for a photographer basing their decision purely on price, you are potentially making yourself uncompetitive. Even if you are technically charging the same as your competitors, you are going to be 20% more expensive than those who are not registered because you have to add the VAT on to your fee.
There is something important you need to know if you are planning on selling wedding albums. When I registered for VAT, the printers had to charge me VAT on wedding albums. Because I could claim back VAT on my purchases I effectively only had to add VAT to the amount of “mark up” I added to those wedding albums when supplying them to my clients.
The law changed. Books are exempt VAT. It was eventually decided by the courts that a wedding album, where the pages are fixed and cannot be changed, fitted the definition of the word “book”. Therefore, wedding albums with fixed pages (that’s practically all of them) are currently exempt VAT.
One thing I didn’t realise when I registered for VAT is that EVERYTHING I charge my clients for is subject to VAT. (There are a few exemptions, but none of them relate to photography services).
HMRC explained it to me like this. If I travel to London on a train I purchase a ticket which currently costs around £50. Train travel is exempt VAT. If I decide to charge my client for my train ticket I have to charge them £60. Yes, I have to add VAT to the price of the train ticket.
Now the same applies to wedding albums. They are exempt VAT and the printers do not have to charge it, but if I supply them as a service through my VAT registered business, I have to charge my clients VAT on their wedding album.
I have had a lengthy email exchange with HMRC as at first I struggled to understand the logic and the fairness of this, but they are adamant that I have to charge VAT on wedding albums to comply with the law as it currently stands.
This is something you need to consider when you are deliberating whether to register voluntarily or not as it will have a direct impact on how competitive your pricing is on wedding albums as well as your other services. Obviously I will comply with the law but I do hope one day the law changes as, to me, there is no doubt this is unfair and had I been aware of the impending change (I don’t have a crystal ball so obviously I couldn’t predict this change) it would probably have swayed my decision towards NOT registering voluntarily.
I must admit though that my wedding album sales have increased steadily year on year, so read into that what you will.
If anyone knows differently and is aware of a legal system whereby I would not have to charge VAT on wedding albums, I would love to hear from you.
There is another possible change in the law currently being considered which may effect your decision. I have read that because of the way society is changing the number of “employed” people is actually going down whilst the number of “self employed” people is increasing substantially.
This change is apparently effecting the amount of revenue HMRC are receiving ( tax receipts are going down ).
In addition, HMRC have apparently noticed a trend whereby a lot of small businesses and the self employed conveniently have an annual turnover just below £85,000.
In order to address these issues, the government is looking at ways they can change the law and bump their tax receipts back up again.
I have read one proposal being given serious consideration is to LOWER the VAT threshold to as little as £20,000 so that effectively ALL small business and the self employed will HAVE to charge VAT to their clients. As I don’t want “politics” to form any part of this blog, I will leave you to form your own opinions on that particular proposal.
So, should you register voluntarily for VAT or not ? This is not a “cop out” on my part but I can’t answer that question for you. Like so many things it depends on your own personal situation, your own finances and your longer term ambitions for your business, not to mention any possible future “changes” in the law. ( I must add a crystal ball to my Christmas “wish list” this year ).
In my own case, had I known that wedding albums would become exempt VAT, I probably would NOT have registered. Having said that, if they carry on with the proposal to substantially reduce the VAT threshold, I will probably be glad that I did register and claim back the VAT on my equipment while I had the chance.
My advice is to give this subject careful thought. Consider your own personal circumstances and your long term plans for your business, then decide whether “voluntary registration” seems like the right thing for you.
If you have any other issues you would like me to give an opinion on or relay my experiences with, don’t hesitate to get in touch via email.