profit and vat under threshold

[shimell]

I run a limited company operating under vat threshold. I am looking at registering for vat so the company can claim it back on purchases, stock etc.
What i am wondering is how vat affects profit calculations and how it is treated when i dont need to pay it as under threshold.
To my understanding i charge vat to customers but as i am going to be under the threshold i dont have to pay any to inland revenue.
In turn is this treated as taxable profit?
How does this money get accounted for?
hope this is clear, any advice would be great.

[Leo-InstallingIT]

As soon as you become VAT registered you start paying VAT to the HMRC. So when you sell a product for £10 + VAT (£11.75), the amount you use in any turnover or profit calculations is £10, the £1.75 you give to the HMRC.

If you brought that product for £5 + VAT (£5.88), then you can claim back the VAT paid from the HMRC. So you are only paying VAT on your profit from the item effectively.

So your profit is £10 - £5 = £5.

You would owe the HMRC £1.75, but they would owe you £0.88, so you would pay them 87p.

I hope that helps.
Many Thanks

Leo

[shimell]

but if operating under the £70,000 threshold then i dont need to pay the 87p
what happens to it?
is it classed as taxable profit?

[Leo-InstallingIT]

Yes you do.

You are only required to register once you reach the threshold. But if you voluntarily register, then the same rules apply.

Many Thanks

Leo

[shimell]

It is voluntary registration, but to be fair the original question has not been answered

[Leo-InstallingIT]

What I meant by the same rules apply is that you still have to pay the VAT to the HMRC even if you are under the threshold.

Many Thanks

Leo

[Truemanbrown]

Can I ask you a simple question - Who do you trade with?

Do you trade with other business that are VAT Registered or do you trade with ordinary, unregistered customers (i.e. the public).

If the former, then from a commercial point of view, you should have no problem voluntarily registering because you can simply just add the VAT on top of you sales price.

If the latter, the from a commercial point of view, you may have a problem. If you added the VAT on top of your sales price you may find yourself pricing yourself out of a sale.

Can you give me more information on what you do.

[shimell]

got it, once registered you have to pay vat on sales regardless of the threshold limit. Time to do the math.

[KM-Tiger]

Time to do the math.

Include in your sums whether you would be better off using the Flat Rate Scheme. Depending on what you do and your usual ratio of inputs to outputs, you might be.

IIRC there is a calculator at the HMRC website that will help with this.

[shimell]

i would class myself as printing, under flat rate i would pay 7.5% I think registering would simply eat into profits as market too competitive to pass costs onto customers, who are as a general rule members of the public or small non vat registered businesses like myself. I think the vat registration will only happen if a fruitful contract with a large company comes along, there are a few things in the pipeline with a couple of well known retailers so will have to wait and see.

Heres to taking voluntary redundancy from a job that you hated and setting up your own business in the middle of a recession. A year to the day and all the bills are still getting paid (just..lol)

[Spongebob]

If your customers are not registered then you should avoid registering yourself for as long as you can. If your customers are VAT registered then you might as well register yourself as they can claim back any VAT you charge them and you can claim back the VAT on your purchases.

My customers are all members of the public and I trade just below the VAT registration threshold. As my margins are around 80% VAT registration would cost me around £7.5k per year! When the rate goes up next year my advantage increases.

VAT registration can be a very expensive mistake for certain businesses. It would actually be cheaper for me to go on holiday for three months a year rather than break through the £70k threshold!

[shimell]

True. The vat office states you must register 30 days before you are going to go over the threshold. Shut down for the remainder of the year seams the better option.

[taxattack]

True. The vat office states you must register 30 days before you are going to go over the threshold. Shut down for the remainder of the year seams the better option.

That is one of the two tests for compulsory Vat registration - but it only applies if turnover in the next 30 days alone is expected to exceed the threshold. It is intended to catch large one-off transactions.

The test which will usually apply is turnover in the previous 12 calendar months. If at the end of any month turnover has exceeded the threshold, registration must be made within 30 days, and will apply from the first of the month following registration, ie "month 14".

As has been said, if you sell to the public or other non-registered entities, you are better off not registering.

Chris

[David Griffiths]

True. The vat office states you must register 30 days before you are going to go over the threshold. .

It doesn't actually.

It says that you must notify them within 30 days of the end of the month in which you went over the threshold, and are registered from one month later

You only have to register immediately if you know or have reasonable grounds to believe that turnover will exceed the registration threshold in the next 30 days alone.

[KM-Tiger]

It would actually be cheaper for me to go on holiday for three months a year rather than break through the £70k threshold!

Now there's a business opportunity if I ever saw one:

Bored with Blowing the winter fuel allowance in Barbados?

Give yourself a proper holiday FOC courtesy of HMRC!

Here's how it works ...

[paulears]

It's also complicated by the fact that when you do the sums, you need to also consider any expensive purchases you plan to make - computers, and other specialised kit. Most printers I'm aware of are registered, so it could be that if your customer base are consumers, then you'd be cheaper than them, but when I've ever had quotes from business style firms, they usually quote ex-vat prices anyway, adding the 17.5% on automatically - this is often why 'trade counters' appear cheap - compared to B&Q, Wickes etc.

However - why just not ask your accountant who will know the answer, rather than us guessing?

[Spongebob]

Now there's a business opportunity if I ever saw one:

Bored with Blowing the winter fuel allowance in Barbados?

Give yourself a proper holiday FOC courtesy of HMRC!

Here's how it works ...

:)

Seriously though, the current registration threshold of £70k does act as a big disincentive to business expansion and therefore employment opportunities.

One man band service businesses such as plumbers, decorators, electricians etc can make a very nice living trading under the threshold. Generally they will not charge their customers any less in total than their VAT registered competitors; they simply keep the extra 17.5 % for themselves rather than have to send it off to HMRC!

As soon as they take on even one employee however, or form a partnership with another tradesman, they are inevitably tipped over the threshold, are forced to register, and immediately lose 10-15% of their net income!

It is no wonder that such self-employed people are reluctant to take on apprentices etc when it impacts so severely on their incomes.

The VAT threshold could either be lowered to say £25k so that all full-time businesses were caught in the net or raised to say £250k so that small businesses were encouraged to expand without penalty. I would favour the latter. Assuming there are a million such small one man businesses in the country, probably half a million full-time jobs could be created almost overnight!

[none]

Hi everyone

I know this thread is quite old but I would have a question about this subject. Firstly my language is not native English so sorry if I do a mistake.
I live in the UK since 2009 and I have taken over a cleaning business (partnership) from someone from April 2010. Im not familiar with English law and VAT -TAX at all but now I`ve arrived to that point when I have to make this clear.
When we took over this cleaning business the previous owner sort of "taught" us how to fill in the VAT boxes on HM Revenue`s website. Ha said (now I think wrongly) we should type in each field "0". Few days ago we reveived a letter from HM Revenue about cancelling our VAT registration as "we have not made any recent taxable supplies". Well, this letter a bit scared me out and I started to look after things. (Might be to late) The previous owner said as we are under VAT threshold we have to type always zero in each field. He also said we do not have to pay the VAT for HM Revenue we can keep it. What to do now? I would really appreciate ANY advice! We`ve been giving our invoices with 20% since April 2010. Now we have to pay that 20% VAT for HM Revenue from April 2010 till now? Everything?

Thanks

[Anna Chandley]

Hi everyone

I know this thread is quite old but I would have a question about this subject. Firstly my language is not native English so sorry if I do a mistake.
I live in the UK since 2009 and I have taken over a cleaning business (partnership) from someone from April 2010. Im not familiar with English law and VAT -TAX at all but now I`ve arrived to that point when I have to make this clear.
When we took over this cleaning business the previous owner sort of "taught" us how to fill in the VAT boxes on HM Revenue`s website. Ha said (now I think wrongly) we should type in each field "0". Few days ago we reveived a letter from HM Revenue about cancelling our VAT registration as "we have not made any recent taxable supplies". Well, this letter a bit scared me out and I started to look after things. (Might be to late) The previous owner said as we are under VAT threshold we have to type always zero in each field. He also said we do not have to pay the VAT for HM Revenue we can keep it. What to do now? I would really appreciate ANY advice! We`ve been giving our invoices with 20% since April 2010. Now we have to pay that 20% VAT for HM Revenue from April 2010 till now? Everything?

Thanks

I'm afraid what the previous owner told you was completely wrong. If you are VAt registered and have been charging VAT so you should have been paying that VAT over to HMRC.

You also need to check that the business VAT registration actually transferred to you when you took over the business.

If you have an accountant you need to see them now to sort out this situation.

If you have not got an accountant then find one now.

Anna