Turnover Tax: Gross Means Gross

Turnover Tax applies to resident businesses whose annual turnover falls within a defined band, and it is charged as a percentage of gross monthly receipts. There is no deduction for purchases, rent, salaries or any other cost of earning that revenue.

For a business with healthy margins, the regime is generous and the administration is light. For a high-volume, low-margin trader - a distributor moving goods at a few points of markup, say - the charge on gross can exceed what the same business would pay on its profit under the ordinary corporation tax rules. It is entirely possible to owe Turnover Tax in a month in which the business lost money.

That is not a defect in the design; it is the trade-off the design makes. Simplicity is bought with a base that ignores costs. The error is not choosing the regime, it is choosing it without running the comparison.

The comparison is a single spreadsheet. Take twelve months of actual gross receipts and actual net profit. Compute the liability under Turnover Tax on gross, and under the ordinary regime on profit. Compare the totals, and then stress the answer against a bad year - a margin squeeze, a slow quarter - because the regimes diverge most sharply when margins compress.

Do this before electing, and revisit it annually. A business whose margin structure has changed may be sitting in the wrong regime and paying for the privilege.

Growth through the upper threshold changes the obligation set mid-year, and it does not change gently. The business moves to the ordinary regime, and depending on its activity may also cross into VAT registration at a different threshold on a different basis.

That is a systems and pricing problem before it is a tax problem. VAT registration changes invoicing, the sales ledger, the treatment of input tax on purchases, and - if the business has been quoting inclusive prices to consumers - its effective margin on every existing contract.

A business approaching either threshold should be modelling the crossing at least two quarters ahead. The businesses that struggle are the ones that discover the change in the month it happens and spend the following year filing corrections.

Because Turnover Tax is computed on gross receipts, the filing itself demands very little: a monthly figure. That is exactly why record-keeping decays under it.

Keep the full purchase and expense records anyway. You need them the moment you leave the regime, whether by growth or by election; you need them if the gross figure is ever questioned; and you need them to run the comparison above. A business that has kept only its sales totals for three years has no way to demonstrate it was in the right regime, and no basis to argue it should have been in the other one.