Are you VAT registered? Are you close to the threshold? What should you do?
The VAT threshold for 2024 is £90,000 (up from £85,000). The government announced this increase in the Spring Budget, with the new threshold coming in from 1 April 2024. The VAT registration threshold is set by HMRC every year – but it had remained unchanged since 2017-18 until increasing in 2024-25.
Becoming VAT-registered may seem intimidating, but many clients will prefer working with other VAT-registered companies. They can reclaim the VAT they pay on your goods/services, so the actual cost they pay will ultimately be the same as pre-VAT prices.
Most of the buyers that we deal with are well above the VAT threshold. They are looking to buy fees to grow their practice and if we are dealing with a seller who is not VAT registered then the buyer has three options:-
- Increase the fees by 20% on the day of completion for all works done.
- Increase the fees incrementally and absorb some of the VAT increase for the first year or so.
- Don’t increase the fees.
Most buyers will increase the fees on day one by the full 20%. Clients that are VAT registered will be able to claim the VAT back on their returns and will not worry. It is the smaller clients ie tax returns only, that will potentially have a problem with such a steep increase in fees. This can result in a number of clients leaving and finding another accountant that is also not VAT registered. Not all clients will leave despite the extra 20% being added on, 70% will stay through inertia.
Some buyers will put the fees up by 10% in the first year and 10% in the second year. This will reduce the attrition rate, but it will take longer for the buyer to get a return on their investment and not many buyers are happy to do that. We have seen some deals go through on this basis but it is our experience that where an accountant buys an accountancy practice, they are looking for a short time frame for a return. Having a two step increase in fees will increase the time scale for getting this return.
I am not aware of any buyer just absorbing all the fees and not increasing them. But it is a genuine choice that a buyer has, albeit not a very good one.
Our advice to all vendors is that if you are coming up to the VAT threshold then register for VAT as soon as you are able, at least a year before you start to look for a buyer. And whatever you do, do not de-register from VAT however much below the threshold your fees are.
If you want to discuss this and any other topic relating to selling your accountancy practice then please get in touch with me, Nicola Draper, on 01788 816440 or email me at n.draper@draperhinks.co.uk. Let me see how I can be of assistance. I look forward to talking to you.