Surpassed £85,000 VAT threshold selling second-hand goods - how shall I go about managing the implications? 23 y.o total accounting novice.

[coffeedrinker]

I have a business selling second-hand clothes on eBay which regrettably sailed past the £85,000 threshold a couple of months ago without me even realising that this threshold existed! Totally foolish on my behalf and I take full responsibility for not educating myself earlier on the issue.

Regardless, I now have a tricky situation to deal with. My intention is to apply to HMRC with evidence that this was due to a temporary spike in sales (I had a massive pile of stock saved up to list when I graduated univeristy in the summer). With any luck this will mean I don't have to permanently register for VAT. This leaves me with the 14 months or so of sales that I now need to pay VAT on.

Unfortunately, as a significant chunk of this stock was purchased from charity shops and car boot sales there are no paper receipts for the purchases. I do, however, have all records of purchases on my bank statements. For my self-assessments up to now I have just subtracted expenses from my income within the tax year as opposed to accounting on an item-by-item basis. I now have approximately 1,000 items to individually account for from this period! This leaves me with a handful of questions that it would be great to get some feedback on:

- Does the VAT declaration absolutely have to be on an item-by-item basis or can I use net sales minus net purchase price during the 14 months and then pay 16.6% of that figure?

If not

- Will I be able to use the VAT margin scheme for second-hand goods to account for sales in these 14 months even if I don't have solid paper receipts?

- Just to clarify - do you pay VAT on every sale up to, including and after the £85,000 rolling 12 month period or just once you pass it?

- Is everything going to be okay?

- I visited a local accountant and they quoted £210 per hour for detailed accounting advice - shall I just bite the bullet and pay or can this be done myself or cheaper elsewhere (I am very keen to learn lessons for future)?

Any responses will be greatly appreciated, thank you so much for taking the time to read.

 

[mosherjosh]

@coffeedrinker As a VAT specialist, there's a few things to address here which i will look at after work if i have the time.

But £210 per hour is not a bad price (but thats coming from someone who is ex-big 4 where charge out rates can be very high).

When it comes to online sales and the second hand margin scheme, proper VAT advice, or an accountant that knows what their doing VAT-wise is definitely the way to go.

 

[coffeedrinker]

@mosherjosh Thank you for taking the time to read and reply, it is greatly appreciated.

I think you are right in terms of paying the accountant. She was very helpful in our consultation but I feel there is a lot I can do myself before I go back to her in order to save money. I am in the process of tallying up every item I have sold within the 14 months and inputting what I paid for those items that I have a record of buying (roughly half from online purchases with receipts). The other half that remain unaccounted for will be the problem but it may just be a case of painstakingly matching a bank transaction to an item at a time to the best of my ability (whilst learning a very important lesson in organisation).

If you do get the chance to have a closer look at my predicament at any stage I would be immensely grateful.

 

[mosherjosh]

@coffeedrinker You’ve asked multiple questions, so I’m going to address them one by one.

NOTE: I’ve typically worked with multinationals/household names. VAT for sole traders/individuals is not something I’ve looked at for some time. Goes without saying that this isn’t advice – speak to your accountant (and look for someone with experience/existing clients that are online sellers and/or use the margin scheme).

VAT registration

There are two different tests for the purposes of registration: historic and future tests.

The historic tests involves tracking your sales on a 12 month rolling basis to determine whether you have crossed the VAT registration threshold (which is now £90k as of 1 April, however as it appears you crossed the threshold a few months ago, the £85k threshold should apply).

If by the end of any month you have crossed the threshold, you have 30 days to notify HMRC and are required to be registered by the first of the following month.

E.g. between 4 January 23 and 3 January 24 your taxable supplies (i.e. sales that would be subject to VAT, if you were registered) are £88k. you notify HMRC and register by 29 February, with registration effective from VAT from 1 March 24.

You’ll be pleased to hear – it is only from the date you are registered from VAT (or should be registered) that you start accounting for output VAT.

Registration can be done online via HMRC’s portal. I always used to use Form VAT1 to register clients, I think that was done away with a few months ago. Can only register online now.

If you are late in registering, you need to account for VAT on all supplies made from the date you should have been registered. E.g. using above example, you realise today that you should have registered from 1 March. You register and account for VAT on supplies made between 1 March and today on your first VAT return.

If you don’t believe you will stay above the VAT threshold and have only temporarily crossed it (again, now £90k which will be to your benefit), you can apply for exception from registration. This involves writing to HMRC with evidence/an argument as to why you don’t think you will cross the deregistration threshold it over the next 12 months (which is now £88k).

As I write this, its probably worth noting that if you fall below the deregistration threshold above, you can deregister from VAT online. If you are currently above what was the £85k threshold at the time you crossed it, but currently below the £88k threshold, I would suggest you write to HMRC explaining this, and that you don’t think you need to register on the basis that the registration and deregistration thresholds have changed from 1 April.

Self-assessment

Not a personal tax specialist, but generally my understanding is that you need receipts/invoices to back up your expenses for the purposes of determining your taxable income. Not saying you cant take the easy route of looking the net position between revenue and expenses for the purpose of submission, but I’d make sure I keep, or get hold of, receipts to back it up in the event HMRC come knocking.

VAT returns

The VAT return is 9 boxes, with only boxes 1 (output tax), 6 (sales less VAT on margin) and 7 (full purchase price of goods purchased) populated for margin scheme users.

As with the above on self-assessment, you need to be able to back up these figures if HMRC enquire (and HMRC have bolstered up their teams that focus on SMEs/sole traders so I wouldn’t assume that they wont at some point).

Assuming you will use the margin scheme, there are a number of things to consider when it comes to keeping appropriate records for VAT purposes and this response is already quite long. I would look up the VAT margin scheme (literally google “VAT margin scheme HMRC”) and check the guidance in record keeping section. Bottom line is you need invoices/receipts for both sales and purchases.

You’re running a decent 5 figure business. Its unsurprising that you’ll need to keep proper records at this point.

Remaining points

No idea if there’s a max word count on reddit as I’m usually a lurker and don’t comment, so bullet points for the next few:

• Second hand margin scheme can be used for clothes and from memory is generally 16.67% on the difference between the cost of the goods, and what you sell it for, but to use it generally you do need receipts. Again check HMRC guidance on what is required specifically for the margin scheme as I cant remember off the top of my head

• You account for VAT from the point you are VAT registered, or liable to be VAT registered as stated above

• Everything will be alright, as long as you are proactive in your approach to tax and accounting. It’s far better to pay a king’s ransom to an advisor, then three king’s ransoms in penalties and back taxes to HMRC. During my time at the big four there were times where we charged 6 figure fees, but saved clients millions in tax. You get what you pay for.

• The quality of accountants can vary. Do your research before hand and make sure your comfortable with them before engaging. Ask the right questions – the better the questions, the better the answers

Sorry it’s a bit long, there’s bit more to VAT than just 20%! Formatting is all weird as well as I typed this in Word.

 

[coffeedrinker]

@mosherjosh !thanks

 

[robbie0376]

@coffeedrinker Hi there @coffeedrinker I'm a trainee accountant from a national (not quite big 4 but we're in virtually every city) in the southwest and deal with a lot of sole traders such as yourself.

Firstly, congratulations on running a business successful enough to even be close to the VAT registration threshold!

As for your questions:

• Since the introduction of 'making tax digital' or MTD for short, all VAT returns (and soon income tax) will have to be prepared on a line by line basis with digital records backing up the figures. This means you will need to have a software package such as Xero or quickbooks and analyse out your bank statements line by line. You will need to have invoices for every item you intend to claim and declare VAT on.

The UK Government for all its flaws, has an absolutely fantastic and easy to digest manual on most taxes and the various tax schemes. https://www.gov.uk/vat-margin-schemes

• As others have said, you do not need to pay VAT on any items sold before you breached the registration threshold, but you will on anything afterwards.

There are other VAT schemes available to you as well, you might want to consider the 'flat rate scheme' where you pay, unsurprisingly, a flat rate of VAT on your total VATable turnover instead of claiming VAT on individual invoices and receipts - this might be useful to you if a lot of your expenses are non-vatable.

• Everything is going to be absolutely groovy, HMRC are not some big gruesome beast to be scared of, they are perfectly reasonable and if you come forward to them with a willingness to pay what you owe and openness about any mistakes, they will be fair. Honesty and transparency go a long way with our tax inspectors.
• Accountants need not be local these days, but if you feel happy with your local accountant then go ahead. £210/hr is fairly average. If you wanted an accountant to assist with the preparation of the VAT returns, then the fee for this could vary wildly depending on the quality of records you supply, the amount of transactions per quarter and how much you're willing to do yourself. If you can manage the bookkeeping largely on your own and just want a second pair of eyes to check and submit it, then you won't be looking at a very large fee each quarter. If you want them to prepare it from scratch then it could get much more expensive.

As others have said, at your income level regardless of the VAT threshold, I would be wanting to appoint an accountant to deal with the personal tax side of things. You should be keeping far more detailed records than you currently appear to be, and an accountant will quite often be able to support you in more ways than just churning out a set of accounts or a VAT return.

If you think you can explain the blip over the threshold (remember it's a rolling threshold, so you may have been over it for a few months or so - you mention 14 months, did you fully exceed the threshold for those 14 months?) then you can apply for an exemption from registration, if you can reliably prove that you have come under the deregistration threshold (was £83k, has been increased to £88k from 1/4/24) and are likely to remain there.

Usually this only really works for periods of a few months of very high turnover, we had a lot of clients apply for this because of peaks and troughs in business caused by COVID for example.

If there's anything you'd like to discuss further, drop me a message

Good luck!

 

[jarno]

@robbie0376 Out of interest on the VAT exception point have HMRC been prompt at replying to VAT exception applications? Made two around 15 months ago for clients and they're stuck in back and forths with HMRC.

 

[mosherjosh]

@jarno HMRC are taking extremely long to respond to most applications. I doubt they would be prompt at responding to the exception letter. Prudent approach would be for your clients to provide for a potential backdated output tax liability as a precaution.

Agreements with customers should have an appropriate VAT clause, ensuring VAT invoices can be raised at the applicable rate.

 

[robbie0376]

@jarno Absolutely not, HMRC have been extremely slow for pretty much everything for ages. We've been waiting a similar amount of time for a VAT exemption on a liquidating company so it's a real mess!

 

[jarno]

@robbie0376 Glad to hear I'm not alone, turns out they have an email address which they gave me over the phone today. HMRC may well be moving into the 21st century, perhaps by the mid 22nd century

 

[coffeedrinker]

@robbie0376 I massively appreciate the time you have spent writing this incredibly detailed and accessible answer to my query, thank you!

In response to your first point - I have been tallying everything up on Google sheets so far with limited success. Is it worth moving straight across to an accounting platform now? In a similar vein, I imagine it is definitely worth me opening a business bank account?

I will read the relevant sections of the manual you linked - thank you for providing this resource!

Yes, 99% of my business expenses are not VATable (charity shop purchases, car boots, private clients and vinted purchases from private sellers). I’m in the worst case scenario really for this tax! I will explore the flat rate option.

Thank you for your reassuring words, and your advice about getting an accountant at this stage is invaluable! Whilst £210/hr is difficult to swallow, I’m sure a future version of myself will be thankful.

Finally, in terms of the exemption - I’m maybe getting a bit ahead of myself thinking about this at the moment. I do think I have a legitimate explanation for it being a blip but then that throws up questions of how I grow the business in future. Perhaps becoming VAT registered is simply an inevitability that is better to just embrace and accept at this stage than try and put off. All questions I’ll have to think about in the next couple of weeks!

As mentioned above I would love to buy you a coffee or something similar as a token of my appreciation for all of this advice! Get in touch!

Thanks again.

 

[robbie0376]

@coffeedrinker That's quite alright , I rarely have anything to contribute on this sub so it's nice to be able to help!

Regarding the transition to software, I'm honestly not too sure. There is a clear benefit to starting to use an accounting platform, but if you're still a bit unsure about everything then it's often tricker to unpick 'bad' data than it is to just start afresh. So if you're confident with using software or think you could get to grips with it quickly then sure, go ahead.

How are you tallying up your expenses in the spreadsheet? Are you categorising things into like 'purchases' and other such expenses? If so then anything pre-VAT registration can be sort of imported into the software as a single lump figure so you won't necessarily of wasted your time.

I think a business (or at least separate) bank account would help - certainly if you have lots of private transactions going through then it can get a bit messy. Also I suspect if your bank realise that you're trading and not just selling the odd bit, which I'm frankly astonished hasn't happened yet, they might force you to set up a commercial account anyway.

Also remember that if you're a sole trader, a certain proportion of your home expenses will be claimable. You obviously use the internet to make your sales, so you can claim a reasonable proportion of your broadband bills as a business expense (and claim the VAT), you can claim use of home as office, all the postage costs etc.

£210/hr does seem like a lot, but the reality is a more junior member of staff will be doing most of the legwork to prepare your accounts/VAT returns etc whilst the manager reviewing the work will have the higher charge out rate.

If you do apply for the exemption, get it accepted (as I've mentioned to another commenter, there's often a very VERY lengthy delay in getting correspondence to/from HMRC with VAT matters) and you later hit the registration threshold again anyway, they may judge your previous exempt period as void and force you to pay the VAT from when you first hit the threshold anyway, so do be careful!

Final nugget regarding software - if you're looking into accounting software, don't be too put off by the cost, as its tax-deductible. Xero is preferred because it's awesome and has access to lots of plugins and integrations with other software you might find useful like shopify/dext. Cheaper solutions like quickbooks are largely despised by accountants for being a bit wimpy in comparison, and you may have heard that Sage is a very popular software package but in my experience it's old fashioned and extremely expensive.

 

[b0jvyl17]

@coffeedrinker Please speak with your accountant rather than unqualified Redditors

 

[rgsfds]

@coffeedrinker You don’t have to pay VAT on the profit you made during the £85000 of sales. You only have to pay from then onwards (assuming you register in the 30 days after going over the limit).

 

[coffeedrinker]

@rgsfds This is excellent news! I will be several months late in registering but I hope that this will be understood as the genuine mistake that it was and no penalties will be incurred (upon realising I have pulled all my listings from eBay and have been actively trying to rectify the situation).

As the user above has stated, the only consequence of this late registration should hopefully be having to backdate the VAT owed since the day I crossed the threshold. Once this is done hopefully I can try and get myself deregistered then explore my options moving forward!

Thanks

 

[tcboomer]

@coffeedrinker I would recommend keeping all the calculations for VAT in Excel / Google sheets. None of the cloud based accounting solutions mentioned support the margin scheme. Freeagent and Kashflow which are also popular don’t either.

 

[rnin]

@coffeedrinker good luck with your business! im not qualified to give tax advice i would advise speaking to an accountant

 

[coffeedrinker]

@rnin Thanks for your kind wishes!

 

[nkem246]

@coffeedrinker Mad, you must really go to town to turn over that sort of money on used clothes. Most my stuff on vinted doesn't sell. hope you get sorted sorry not really advice