Whilst no two businesses are the same often what makes a business different can also be what makes it successful. But regardless of what your business does or how you operate it, there must always be clarity and consistency when it comes to managing your finances. This is very relevant for your interior design business, because there are potential pitfalls which we want to help you avoid.
Know your limits
We are not talking about what you are able to do but what limits are imposed by the tax authorities. If your turnover (total sales) hits £85,000 in a year, you will have to register for VAT. This will immediately put your prices up by 20%. Although it does mean you would then be able to recoup any VAT you pay on your supplies. It’s not a straight forward decision as to whether you should wait until you reach that level, before you register for VAT. There are many things to consider and understand.
And disbursements have a nasty habit of confusing the issue. You must be sure that you are dealing with them properly, especially if you are VAT registered. And even if you are not, does it count towards your turnover? Maybe it does, maybe it doesn’t. You do need to be clear.
If you are acting as a middle man and the goods are to be treated as a disbursement, you must ensure the following:
- The client must have already chosen the materials they wish to purchase from the supplier before raising the purchase order to the supplier.
- The purchase order and purchase account must be in the customer name and have their address and contact details, including the delivery details for the client where materials should be sent.
- When the purchase invoice is sent by the supplier it must be addressed to the client.
- Payment of the purchase invoice will often be made by the interior design business and a disbursement invoice will be created to send to the client.
- The disbursement invoice must match exactly with the supplier invoice, ie with no mark-up and VAT is not charged. Equally, when the purchase is made by the interior design business no VAT can be reclaimed on the purchase invoice and it is not included in your turnover.
- If the client is VAT registered themselves they will be able to reclaim any VAT that is charged.
This is not a process we would advocate, because you possibly not maximising your profit. Additionally, the goods are the property of your client (they are never yours) and in the event the client refuses to pay you, you are out of pocket if you have already paid the supplier, with no recourse to take back the goods. The interior design business may also keep a track of the order and ensure that the delivery of the materials is on time. The client will own the goods and ultimately the contract remains between the supplier and the client. You are bearing the risk without necessarily the reward.
Our recommended arrangement involves the interior design business procuring materials on behalf of the client, known as a “recharged expense”. This might be the chosen route if the client has not decided on the specific items to be purchased such as where a general budget has been set for an Interior designer to carry out the project. In this instance there may be a mark-up or margin applied unless you choose you keep the transaction completely transparent with no profit. Whilst you bear all of the risk, you have much greater control over your charges and ultimately, how much you charge, directly affects your profitability. Crucially with recharged expenses the invoice will be issued by the supplier to the Interior Designer and the Interior Designer will invoice the client for the project and the goods, in the way they deem most appropriate for their business and if VAT registered charge VAT on all of the items on the invoice.
The sales invoice to the client will include the good and materials purchased for the project that need to be “recharged” and will include 20% VAT on all of the “recharged” expenses. If the interior designer is VAT registered, it will show the costs net of VAT as well as the VAT if the transaction is transparent and if a mark-up is applied, then the value of VAT you charge on will be greater than what you have paid.
The nature of running an interior design business can make the bookkeeping complex. We would advise any interior design business to use a cloud bookkeeping software. Our preferred option is Xero, but there are many others out there. Using bookkeeping software will really help:
- to systemise the bookkeeping process – systemised businesses are the most successful businesses;
- Make dealing with VAT as easy as possible;
- Enable you to monitor cash flow and profitability in real time. There are many add-on pieces of software out there that you can use in conjunction with Xero etc which can help with this and you may already be using some bespoke software aimed at the Interior Design Industry, which will “talk” to the likes of Xero ;
- Ensure you are complaint with Making tax Digital. This is relevant for VAT at the moment, but will affect all businesses subject to Income Tax from April 2023. (read our blog about embracing MTD);
Managing your finances might seem daunting but at DS Small Business Help Ltd we have the skills and the enthusiasm to work with Interior Design Businesses.