This is a subject which interests me and I wrote a book about it which was published earlier in 2014 and the details of which are shown here.
The sad case of Mr Bilsby illustrates a key issue for micro-businesses trading legitimately below the generous VAT registration thresholds. Brian Bilsby is a plumber and heating engineer. He had a very good year in 2008 (presumably before the economic downturn took hold). He carefully calculated that the resulting income nonetheless would not exceed the thresholds. But he made one misjudgement. Instead of asking his customers to buy all the parts from the wholesaler, he obtained the parts and added them to his invoices. His calculations had only taken into account his labour charges, as he thought that the charge for the parts would be excluded, since he did not add any profit on them. He had not reckoned with the rules concerning a principal buying and selling goods, as distinct from acting as agent, and the related rules concerning 'disbursements'. He thought, in a non-technical kind of way, that the parts would be disbursements, when in fact they were part of his service. This took him over the registration threshold.
When HMRC caught up with him, he owed both the VAT and penalties.
He could have arranged matters in order to stay below the thresholds. This is a salutary lesson about making rational assumptions which do not fit the fine detail of VAT legislation.
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