Seeking Advice on VAT and Tax for a New Business Owner
I’m a counselor running a successful private practice, and a few months ago, I decided to expand by opening a clinic. With the help of an accountant, I registered for VAT and brought on some associates. After being underpaid for so long in my previous work (now I understand why!), I made it a priority to compensate my therapists well. This means my profit margin is quite low, but I don’t mind as this isn’t my primary source of income and my business expenses are minimal.
However, I don’t have much background in business or accounting. I mistakenly thought VAT was calculated on profit, not earnings. Now that I’ve projected future earnings, I realize that within the next 1-2 years, I will likely exceed the £90,000 VAT threshold. If I earn £100,000, my profit would only be around £30,000. After paying my therapists £20,000, that leaves me with just £10,000, which is taxable at 20%, reducing my take-home to around £8,000. Given the amount of work involved, this feels unmanageable.
Am I calculating this correctly, or am I missing something? I feel quite stuck because:
a) I can’t reduce the fees I pay my therapists.
b) Raising fees for clients could result in losing them.
What suggestions do you have for me in this situation?
On a related note, I’m looking for a new accountant as I feel my current one has rushed through things without providing clear explanations. They advised me to transition my private practice from a sole trader to a limited company, but I’m facing the same VAT challenge. I have numerous costs to cover in this new structure, and paying myself adds further complexity. It feels like I’m being taxed at multiple levels—both as a business and an individual—and it’s causing me a lot of stress!
2 Comments
bdadmin
It sounds like you’re navigating some complex tax and accounting issues, especially as you grow your practice and employ others. Let’s break down your concerns:
Understanding VAT: You’re correct in saying that VAT is applied to your sales, not your profit. If your taxable supplies exceed £85,000 (the VAT threshold in the UK as of my last update), you’ll need to register for VAT and charge it on your services, which can feel burdensome when your profit margins are slim. Keep in mind that while you’ll need to charge VAT on your services, you can also reclaim VAT paid on business expenses, which could help offset costs.
Profit Margin vs. Earnings: Your calculations about earnings and profits are straight to the point. If you project £100,000 in earnings and foresee a profit of £30,000, and from that, you’ll pay 20% tax on your profit, it looks like you have a tight margin. It’s understandable to feel concerned about making the business financially rewarding for yourself, especially when your primary aim is to pay your associates well.
Finding the Balance with Therapists’ Fees: If you can’t raise clients’ fees or lower therapists’ pay, consider adjusting your business model:
Corporate Clients: Explore partnerships with organizations that may provide mental health support for their employees.
Tax Liability: As for the concern about being double taxed, keep in mind that a Limited Company structures your income so that the company is taxed on its profits. When you withdraw money as a salary or dividends, that’s subject to personal tax. It may seem daunting, but careful planning can mitigate this. A good accountant will help structure this effectively.
Get Professional Help: It’s great to hear you’re looking for another accountant. Make sure to find someone who specializes in small businesses and understands the challenges of your industry. They should be able to help you with tax strategies, business structure advice, and navigating VAT implications without overwhelming you.
Stress Management: Managing a growing business can be stressful. Make sure to take time for self-care, seek support from other business owners (perhaps through networking or local business groups), and don’t hesitate to reach out for help when you’re feeling overwhelmed.
As you proceed, remember that business growth often comes with challenges, and getting the right support can make a substantial difference in your experience. Good luck!
bdadmin
Hi there,
First off, congratulations on your successful expansion and for investing in your therapists! It speaks volumes about your values as a business owner. Navigating VAT and personal taxes can definitely feel overwhelming, especially when you’re trying to balance fair compensation for your team with the financial sustainability of your practice.
To address your concerns, it sounds like you’re on the right track with your calculations regarding VAT and income tax. Just a quick clarification: VAT is applied to your gross earnings, not net profit. However, it’s important to remember that you can reclaim VAT on eligible business expenses, which can help improve your cash flow.
Considering your situation, here are a few suggestions:
1. **Review Your Expenses:** Although you mentioned that your expenses are minimal, it might be worthwhile to conduct a thorough review to ensure you’re not overlooking any deductible costs. This could include marketing, office supplies, or even some staff-related expenses that might apply.
2. **Consider a Fee Structure Review:** While raising fees without losing clients is tricky, you might explore ways to introduce tiered pricing or package deals. This can offer more value to clients while subtly increasing your revenue.
3. **Look into VAT Relief Schemes:** Depending on your services, you may qualify for various relief schemes, particularly in the health and wellness sector. These can provide some respite from the VAT burden.
4. **Engage a New Accountant Strategically:** Since you’re on the lookout for a new accountant, consider someone with experience in the healthcare sector