Tax Dilemma: Need Your Advice!
Hi everyone,
I’m a counselor running a successful private practice, and a few months ago I decided to expand by opening a clinic. With the assistance of an accountant, I’ve registered for VAT and brought on some associates. My primary goal is to ensure that my therapists are fairly compensated, resulting in lower profit margins for me. Since my clinic isn’t my main income source and comes with minimal expenses, I felt comfortable with this approach.
However, I’m not very experienced in business or accounting, and I made an error in assuming that VAT is calculated on profit rather than total earnings. Looking ahead, I’ve realized that if my clinic continues to grow as expected, I will likely surpass the £90,000 VAT threshold within the next couple of years. For example, if we generate £100,000 in earnings, I anticipate my profit will only be around £30,000. After paying £20,000 to my therapists, my taxable income would be about £10,000, which is subject to a 20% tax. Ultimately, this leaves me with roughly £8,000, which feels disproportionately low for the effort I’m putting in.
Have I grasped this correctly, or am I missing something important?
I feel a bit trapped because: a) I can’t reduce my therapists’ fees, and b) I’m hesitant to raise client fees for fear of losing them. What would you do in my situation?
P.S. I’m currently looking for a new accountant as I felt my previous one rushed through things and didn’t provide clear explanations. They advised me to transition my personal private practice from a sole trader to a limited company, which I did, but I’m still encountering the same VAT concerns. Additionally, with the costs associated with the business and needing to pay myself, I worry about being taxed at multiple levels—both as a business and as a sole trader. It’s all quite stressful!
Looking forward to your insights!
3 Comments
It sounds like you’re in a challenging situation, but it’s great that you’re seeking advice and trying to understand your options. Here are some thoughts that might help you navigate your current tax dilemma:
Clarify VAT Understanding: First, it’s important to understand that VAT (Value Added Tax) is indeed applied based on your total revenue, not profit. If your clinic’s taxable turnover exceeds £85,000 (as of my last update), you must register for VAT. Once registered, you’ll need to charge VAT on your services, which could actually increase your overall income when you pass it on to clients.
Review Fee Structure: While raising fees for clients might feel risky, consider whether there’s a way to introduce package deals or loyalty discounts. Alternatively, offering a sliding scale based on income could attract more clients without alienating existing ones. It may also be worth exploring if your services could be bundled or supplemented to offer higher value.
Cost Management and Efficiency: Since you aim to pay your therapists well, it’s essential to evaluate all your costs. Are there any operational efficiencies you can implement or expenses you can reduce? Sometimes, even small changes can positively impact your profits.
Consult a New Accountant: Since you’ve mentioned that your current accountant may not be giving you the guidance you need, it’s wise to consult another accountant who specializes in small businesses or healthcare providers. They can help with tax strategies, including planning for VAT, optimizing your salary structure to minimize taxes, and ensuring you’re compliant with tax regulations.
Consider Business Structure: You mentioned switching from a sole trader to a limited company. This can be beneficial for tax purposes and liability protection. However, it’s important to understand the implications fully. An accountant can advise whether to maintain this structure or explore alternatives that might suit your operational needs better.
Financial Forecasting: Try to create a financial forecast with realistic projections for income and expenditures. This will help you to see when and if you will hit the VAT threshold and allow you to plan appropriately.
Tax Efficiency: Explore legal tax efficiencies, such as utilizing allowances, deductions, and potentially deferring income if needed. Again, a competent accountant will be invaluable in this area.
Stress Management: Lastly, it’s understandable to feel stressed, but ensure you’re taking care of your mental well-being. Consider reaching out to a peer or coach who might provide support or insight into managing stress, especially as you navigate these business challenges.
Ultimately, having the right professional guidance and adjusting your approach slightly can help you navigate this situation more effectively. Good luck!
Hi there,
First off, it’s great to see your commitment to providing fair compensation for your therapists while growing your business. Expanding your practice is a commendable step, but I understand that navigating VAT and taxation can be quite daunting, especially when you’re new to the accounting side of things.
From your description, it sounds like you’re facing a common challenge among small business owners: balancing growth with financial sustainability. One key point to consider is the difference between cash flow and profit. While you might only see a taxable profit of £10,000 after all expenses, your clinic’s cash flow could be much healthier. This distinction is important, as it might affect your decisions on reinvesting back into your practice.
Regarding your VAT concerns, it might be beneficial to explore whether you could register for the Flat Rate Scheme for VAT. This scheme simplifies VAT accounting and might offer better cash flow benefits, especially considering your lower profit margins. It allows you to pay a fixed percentage of your total earnings rather than the standard VAT on your sales. However, it’s essential to assess whether this would be more advantageous based on your circumstances.
Additionally, consider looking into the Option to Tax, which might allow you to reclaim VAT on your costs if you’re renting a property for your clinic, albeit with some implications for how you charge your clients.
Lastly, don’t hesitate to interview several accountants before selecting one who aligns with your needs and can provide ongoing support and clarity as your practice grows. A good accountant can also help you strateg
Hi there, thank you for sharing your detailed situation—it highlights some common challenges faced when expanding into new business areas. You’ve made a good start by registering for VAT and forming a limited company, which can offer some advantages, but your concern about how VAT impacts your profitability is valid.
It’s important to remember that VAT is charged on your sales (or turnover), not profit, so when your revenue surpasses the £85,000 threshold, you’ll need to commence charging VAT on your services. This means you’ll collect VAT from clients and remit it to HMRC, but you can also reclaim VAT on your allowable business expenses.
Given your scenario—where profit margins are slim even with significant turnover—it might be worth discussing with a specialist accountant or tax advisor whether other structures (like different types of company setups or VAT schemes such as the Flat Rate scheme) could be more beneficial for your circumstances. For example, the Flat Rate scheme might simplify your VAT obligations and potentially improve cash flow, though it depends on your specific expenses and turnover.
Regarding your concerns about personal income tax and business levels, a well-structured salary and dividends strategy, tailored to your profitability, can help optimize your overall tax situation. It’s great you’re considering transitioning to a limited company, but ensuring you have a clear understanding of how income and VAT work together is crucial.
Lastly, don’t hesitate to seek ongoing professional advice. A proactive accountant experienced in healthcare or service industries can help you navigate these complexities more