Help Vat And Stuff!!

[rozzski999]

Hi,

After some advice in plain English!

I am just about to open two online stores- one of EBAY and one on the net. I will be selling electrical goods mostly digital cameras and accessories etc.

Now-The company I purchase from (French) charge VAT but if you are VAT registered you do not have to pay it- this would save me a considerable amount of money.

So, if I buy these items and then sell them in my shop would I then have to charge VAT on them as their electrical or can I pass this saving onto the customer?

I also have no idea how much I may turn over this year, i believe the threshold is £70,000. So I would need to register on a voulentary basis.


Rob

[RAL]

You have to charge vat to your customer on supply of taxable goods and services if you are vat registered.

[paulears]

In normal circumstances, this is one example of where being registered doesn't work so well - because your customers are consumers, who cannot claim the VAT back - so compared with somebody not registered, you will be more expensive.

[E Storey]

In normal circumstances, this is one example of where being registered doesn't work so well - because your customers are consumers, who cannot claim the VAT back - so compared with somebody not registered, you will be more expensive.

But, by being able to purcase the goods wholesale without paying VAT, your costs would be less, so you may end up being cheaper?

One thing people do find difficult, is the jump from not charging VAT to charging it.

If you've done your research and expect to turnover £70k plus. It might cause less disruption just to be VAT registered from the start.

[Batra Ventures UK Limited]

But, by being able to purcase the goods wholesale without paying VAT, your costs would be less, so you may end up being cheaper?

One thing people do find difficult, is the jump from not charging VAT to charging it.

If you've done your research and expect to turnover £70k plus. It might cause less disruption just to be VAT registered from the start.

Assuming VAT at 20% in both nations, the net cost is x and the profit margin is 10%.

Non vat reg:

cost = x+x*20/100 = 6x/5 = 1.2x

Selling price = 6x/5+10/100*(6x/5) = 6x/5+6x/50 = 66x/50 = 1.32x

Net profit = 1.32x - 1.2x = .12x and no liablity

Vat Reg:

cost = x

Selling price = (x + 10x/100) + 20/100*(x+10x/100) = (11x/10) + 1/5*11x/10) = 1.32x

Net profit = 1.32x - x = .32x and a .22x VAT liablity (you now have .1x after vat bill)

It may be a wrong calc as I am tired at this point in night, however it looks like not being VAT reg would be a better option.

[Philip Hoyle]

If you're VAT registered, it won't make any difference.

You still have to charge VAT to your customers.

If a supplier charges you VAT you could reclaim it on your VAT return.

If they don't charge you VAT because it's an inter-EU sale, you have to "reverse charge" it on your VAT return meaning you enter it both as output and input VAT. Either way, your "net" cost is the same.

So if your net cost is the same and you charge VAT to your customers, then there are no differences at either end and your profit and selling price are the same.

The only time there'd be a difference would be if you were on the flat rate scheme (and/or possibly a retail scheme). If you're on the normal VAT rules, then no difference.

[sanjiv]

There would be a cost to you.

You pay the net cost and sell to the consumer as a price but that price may have to be reduced to make your product viable for them to purchase, unless of course your major income is from other VAT registered companies where it would make no difference.

Cost = x
Sale = y

y>x

Not VAT registered
Profit = x - y

VAT registered
Cost = x/1.175
Sale = y*1.175
Profit = (x/1.175) - (y*1.175)

Plug some figures into x and y and profit will be lower for VAT registered unless y is less that x in which case you will be a loss making business and that would not be a business.

[kulture]

In simple terms, if you are VAT registered then you must charge your customers VAT when you sell.

If you are NOT VAT registered then you must pay the VAT your supplier charged and you cannot claim it back.

If your suppler is in France then you are likely to be paying 19.6%.

So all the above examples are inaccurate in your case.

[sanjiv]

If the VAT rates are different, then you would have to do some calculations as to whether VAT registration is worthwhile. It would only be worthwhile if the VAT rate is greater in France and if your GP is lower than the difference in VAT.

[Christiane]

The other point to take into account, which I have found at my own expense this year, is your VAT liability at year end.
I *used* to buy a lot from Europe, hence not paying VAT on import. I thought it was great for my cashflow BUT, at year end, I had to repay a lot more VAT that I would have done if I could have put more VAT (input tax) against VAT on my sales (output tax).

Maybe an accountant can explain this better than me....

[JamieM]

But, by being able to purcase the goods wholesale without paying VAT, your costs would be less, so you may end up being cheaper?

No he wouldn't. The difference in the France and UK VAT rates would have to be a lot greater for that to be true.

If you're VAT registered, it won't make any difference.

You still have to charge VAT to your customers.

If a supplier charges you VAT you could reclaim it on your VAT return.

If they don't charge you VAT because it's an inter-EU sale, you have to "reverse charge" it on your VAT return meaning you enter it both as output and input VAT. Either way, your "net" cost is the same.

So if your net cost is the same and you charge VAT to your customers, then there are no differences at either end and your profit and selling price are the same.

The only time there'd be a difference would be if you were on the flat rate scheme (and/or possibly a retail scheme). If you're on the normal VAT rules, then no difference.

What won't make any difference to what?

There is a big difference to being VAT registered or not:

If he's not VAT registered, buys a widget for £10+VAT from France and sells for £20, he makes £8.04.

If he is VAT registered, buys a widget for £10 (vat zero rated and reverse charged) and sells for £20 he makes £7.02.

The other point to take into account, which I have found at my own expense this year, is your VAT liability at year end.
I *used* to buy a lot from Europe, hence not paying VAT on import. I thought it was great for my cashflow BUT, at year end, I had to repay a lot more VAT that I would have done if I could have put more VAT (input tax) against VAT on my sales (output tax).

Maybe an accountant can explain this better than me....

Yeah it is good for your cashflow but you still have to manage it.


After some advice in plain English!


Rob, if your sales are to consumers which it sounds like they are, it will cost you more money if you register for VAT. Don't do it until you reach the threshold.

[David Richards]

The other point to take into account, which I have found at my own expense this year, is your VAT liability at year end.
I *used* to buy a lot from Europe, hence not paying VAT on import. I thought it was great for my cashflow BUT, at year end, I had to repay a lot more VAT that I would have done if I could have put more VAT (input tax) against VAT on my sales (output tax).I don't think that's particularly because of buying goods from Europe, it sounds like you're on an Annual Accounting scheme and it's a side effect of that. On the annual scheme, you make interim payments based on the previous year's turnover. If your turnover increases, then you'll have a balancing payment to make at the end of the year - which can potentially be quite a lot.

If you're on an annual scheme, your accountant should have pointed this out to you (especially if your business is growing and your turnover is increasing) and advised you to make additional interim VAT payments in order to smooth out the effect on yout cashflow. Similarly, if your business is growing, it might be that the annual scheme is not right for your business and it would be better for your cashflow to move to quarterly VAT returns - again, speak to your accountant.

[David Griffiths]

The other point to take into account, which I have found at my own expense this year, is your VAT liability at year end.
I *used* to buy a lot from Europe, hence not paying VAT on import. I thought it was great for my cashflow BUT, at year end, I had to repay a lot more VAT that I would have done if I could have put more VAT (input tax) against VAT on my sales (output tax).

Maybe an accountant can explain this better than me....

Your output tax is based on your sales, so that's the same if you source your product in the UK or in the EU

You can deduct from this your input tax. So if you source in the UK, you might have £1,000 of VAT to deduct. If you source in the EU you don't have any input tax to deduct, but have paid out £1,000 less to your supplier.

It's completely neutral from a profit standpoint. If the larger VAT bill comes as a nasty surprise you are either not managing your cash properly or not managing your accounts to be aware of the liability building up

[David Richards]

There is a big difference to being VAT registered or not:

If he's not VAT registered, buys a widget for £10+VAT from France and sells for £20, he makes £8.04.

If he is VAT registered, buys a widget for £10 (vat zero rated and reverse charged) and sells for £20 he makes £7.02.This assumes that the trader's main desire is to achieve a £20 retail price - whereas the trader may have different price models in mind. Say the trader actually wants a 50% profit margin on the cost price, this gives:

£10 + 19.6%VAT = total cost price of £11.96. 11.96 + 50% profit = retail selling price of £17.94
£10 + no VAT = total cost price £10. 10.00 + 50% profit = £15. 15.00 + 17.5%VAT = retail selling price of £17.63

It also assumes that the item in question is both standard rate in both France and the UK - if that's not the case (e.g. children's clothes, which are zero rated in the UK but I think are standard rated (19.6%) in France) then the non-VAT registered trader would be at a big disadvantage.

So whilst it may be true that many (most?) businesses will benefit by not registering for VAT, the decision to voluntarily register for VAT or not is individual for every business and specific to their circumstances and their chosen business model.

[IanBrewster]

Don't forget to crunch the numbers for 20% VAT as well.

[JamieM]

This assumes that the trader's main desire is to achieve a £20 retail price - whereas the trader may have different price models in mind. Say the trader actually wants a 50% profit margin on the cost price, this gives:

£10 + 19.6%VAT = total cost price of £11.96. 11.96 + 50% profit = retail selling price of £17.94
£10 + no VAT = total cost price £10. 10.00 + 50% profit = £15. 15.00 + 17.5%VAT = retail selling price of £17.63

In the first example he makes £5.98 and in the second he makes £5. Easy choice for me. If you are trying to determine whether it is more profitable to become VAT registered or not then it makes sense to compare like for like retail pricing.

It also assumes that the item in question is both standard rate in both France and the UK - if that's not the case (e.g. children's clothes, which are zero rated in the UK but I think are standard rated (19.6%) in France) then the non-VAT registered trader would be at a big disadvantage.


No it doesn't assume that. Rob stated that he is selling electrical goods.

So whilst it may be true that many (most?) businesses will benefit by not registering for VAT, the decision to voluntarily register for VAT or not is individual for every business and specific to their circumstances and their chosen business model.

I agree but only in circumstances where you have a significant proportion (or all) B2B sales, exporting, or like you say if there are significantly differing VAT rates between EU member states. And possibly some other specific circumstances.

[David Richards]

It also assumes that the item in question is both standard rate in both France and the UK - if that's not the case (e.g. children's clothes, which are zero rated in the UK but I think are standard rated (19.6%) in France) then the non-VAT registered trader would be at a big disadvantage.

No it doesn't assume that. Rob stated that he is selling electrical goods.
Apologies, I thought it was clear from the context that I was discussing general principles, not any particular trader's specific situation.

In the first example he makes £5.98 and in the second he makes £5. Easy choice for me.
That may be an easy choice for you, but it might not be the appropriate choice for everyone. Yes the the first example makes more profit, but it's involved a bigger outlay of cash initially and thus a bigger risk.

So whilst it may be true that many (most?) businesses will benefit by not registering for VAT, the decision to voluntarily register for VAT or not is individual for every business and specific to their circumstances and their chosen business model.

I agree but only in circumstances where you have a significant proportion (or all) B2B sales, exporting, or like you say if there are significantly differing VAT rates between EU member states. And possibly some other specific circumstances.
Which is the point I was making. Don't assume that you are always better off by not being VAT-registered - do the sums for your specific business.