Threshold was 68,500 and I think it went up........If you become VAT Registered IE your turnover (including parts and materials- not your profits) goes over the threshold then you become Liable for VAT at the rate of 20% on all your turnover for the past 12 months, so if you make for your business (put into your business account, not all going on wages to you but even just into your business account) say maybe £ 40, 000 over 11 months, and then somebody says "fit me this marble kitchen, you order it and I will pay you back" and the marble kitchen for example, or office furniture, or building materials etc etc costs £40,000 to buy, you end up having to VAT register and pay full VAT on the lot, which means VAT on the £40,000 materials for that one job, which you pass on to the rather un-amused customer....and the £40,000 turnover that you brought into your little business account in the last 11 months(and mostly went out on bills and expenses/small wages to you) becomes VAT Liable at 20% as well, so thats a bill for £8, 000 for that as well and you better pay up right now thanks very much....
This is because as far as the TAX man is concerned your turnover has just hit £80,000 and he is not interested in your hardship or the fact that you never saw very much of this, he just wants to grab the money because he can do anything he wants to you and you have less than no rights, even if it is his/her mistake/error....
You cant go back to customers and ask for back dated VAT as they have every right to say no, and believe me they will say no and laugh at you, it falls onto you, and the tax man can take your house, car, savings and even your tools and you will be court order bankrupted, I have even heard of cases where they have pursued for TAX owed and managed to close child trust funds and empty them of funds to cover the mother / Fathers Tax...they can crush any one of us like a fly.
I knew an electrician a few years ago who got into trouble with this, he was doing OK running a small business doing emergency light installation and maintenance, and took on a lad to work with him, he paid the lad cash and just billed it onto his customers almost like the lad was a sub contractor and he was dealing with all the finances for him.....he was not VAT registered and just put through his side of the wages and the materials thinking he was in the clear as the other lad was self employed.....well he did a job for a Farmer for about £6,000 for 4 weeks work for him and the other person(including materials) and the farmer asked for a receipt "for his records to remind him what he spent where and when" he hastily scribbled out a carbon paper docket and gave it to him....and the farmer put it in to his accountant who then attempted to write it off against capital allowances....as 50% of the money was not notified on his own tax self assessment and he was paying the other man 50% of everything in cash (other man self employed and supposed to do own tax, so he thought that this was ok and didnt fully understand VAT rules) the TAX man did an ivestigation into his business takings , turned round and said "I think that YOU owe ME £71,000 in backdated VAT".......he managed to beg the taxman not to flatten him and was allowed to pay all that he could afford and keep his house, which was about £22,000 of it, with the provision that he would wind up his business and not start another one for a few years as part of the agreement, as this allowed the tax man to close the case against his business...
He went books in with a company and never started up on his own again, this all happened because he thought he was doing the lad a favour by collecting his wages/payment for him at the same time as his own on one invoice and passing it on to him, basically he was putting through 2 peoples wages through one small business along with the materials and parts used and this pushed it over the VAT threshold, when the TAX man couldnt figure out what was where he just went for the throat and made up a figure that he felt was suitable...
If you are going to end up VAT registering, you will owe 20% on everything earned since the start for the Tax year, I have had quite a few arguments with different people who got really really angry as they were convinced that you only needed to pay VAT on any amount over the threshold, this is wrong, you have to pay VAT on ALL turnover for the year leading up to registering as well, take a look on HMRC website and you will see this...
