I run a small limited company that is currently making just under the VAT threshold, with annual profits of around £85,000 to £90,000. The business is stable and generating consistent profits, and I’m trying to decide what makes more sense financially at this stage. Should I reinvest more of the profits back into the business for growth, or take a larger portion out as dividends? Also, will anything change once I go over the VAT threshold in terms of how I should approach reinvestment versus taking dividends?  

Arthur replies: 

Obviously, if you go over the VAT threshold, you will have to charge VAT on your sales. If you sell to customers who generally can reclaim their input VAT, then charging VAT on your sales should not detrimentally affect your level of sales. But if you sell to customers who generally cannotreclaim their input VAT, then it may not be worth your while going over the VAT threshold, because as a result of charging VAT, one would expect sales to drop. Another consideration is whether reclaiming input VAT is significant in your business. Once you have decided whether it is good for your business to charge VAT on your sales and also reclaim input VAT, then you can decide whether to go in the direction of making your business grow. However, it may be inevitable that eventually you will go over the VAT threshold.