Are you holding back growing your business as you fear passing on the vat in increased prices to your customer?

A dilemma a lot of SME’s suffer is should they  allow their businesses to grow in terms of  declared sales so that they are pushed over the vat threshold?

This decision should be based on a number of factors notibly though on your plans for your final business size, your attitude to  taking on more work and your understanding of the cost structure of your business.


1: What are your plans for your company?

If you ultimately intend to grow your company to say double the size of today then vat registration should be a process that  is done when the upper threshold limit is reached. Where you have fully evaluated the implications both financial and non financial ( i.e additional workloading, financing,  resourcing etc which will result from having a  business with sales volumes double the size of your current  business ) and you are comfortable with taking this on, then vat registration is advised in order to not hinder your plans.


2: The decision as  to whether this increase in cash costs related to the sales vat due to the Inland revenue, should be passed onto the customer is a commercial decision.

If you do not believe that your market will be able to  withstand an increase in selling price you need to establish are  there any other offerings which can be added to the existing package which would enhance your service and to help support the increase or some part of the increase. Is there additional investment  which would help with  enhancing your features, or reducing your resource requirements?

It is also important to  understand who your customer is. If most  of  your customers are the general public, the full amount of the price increase will be felt by them, however if your customers are other  busnesses the addition of vat will hardly be noticed.  If  they are also  registered for vat they will simply reclaim this as part of their vat return.


3: If you have a low margin product but you are currently producing this at way undercapacity, increasing volumes may require minimal effort  as most of the ‘effort’ was in starting up and establishing your business and alot of the costs are fixed.

This is often the case in the manufacturing and engineering industry, Specifically also, a large proportion of your costs are from suppliers of raw  materials whoes vat you can reclaim and offset against your sales value.

This is where the specifics  of your industry really come into  play; the structure of your costs, your profit margin and your desires for growth are the key factors to understand when taking this decision.

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