VAT question approaching threshold but will it destroy profits

[FentonSeller]

Hi there, have had a good look round the forum and found some useful stuff but was after a bit of advice/help from someone in the know how.

We currently sell online (eBay mostly) and are around the VAT limit. We make around 25% of our sales as profit.

I'm a bit worried about becoming registered as when I have done the figures the profit just makes it look like its not worth expanding.

The value of our items we sell is also quite low so we only pay minimal VAT when we import them.

Example:

Turnover:
£60,000
Profit:
£15,000

Turnover:
£120,000
VAT:
£21,000
-£7,000 (Estimated VAT we could claim back in a year)
=£14,000

Profit:
£30000
-£14,000(VAT)
= £16,000

Is it as black and white as this?

I did however today see about a flat rate VAT which on the same example would mean a payment of £7,800 rather than £14,000 could this be an option.

My question really is, is 25% of sales a reasonable amount to make for a business and can it move forward at this rate?

Thanks for any replies.

[wizzard]

Do you have an accountant?

[David Griffiths]

Are your actual selling prices to the customer £120000? In that case, the £120k is inclusive of VAT and the VAT is £17,872, not £21k

[akirk]

Turnover £1,200,000
VAT £178,723
reclaim £70,000 (based on your figures)
payable £108,723
Profit £300,000

Nett £191,277 - very nice thank you :)

You have no choice but to register if the figures hit the correct levels
worth talking to your accountant about the different options - but yes, VAT (assuming that you are not going to pass it on to your clients) will reduce your profit...

think of it a different way - at the moment you are not charging VAT, so currently you are making extra profit...

it will simply be a case of expanding sufficiently that your overall profit outgrows the previous...

don't forget though that you can also reclaim vat on other things as well as the goods themselves - e.g. the computer you use to put it on ebay...

Alasdair

[FentonSeller]

Wow those replies were fast!

Do you have an accountant?
Not as yet.

Are your actual selling prices to the customer £120000? In that case, the £120k is inclusive of VAT and the VAT is £17,872, not £21k
Yes this is an estimate at £120,000, OH I see what you mean, I didn't think of that, thanks alot I will look into correcting that error on my forecast!

Turnover £1,200,000
VAT £178,723
reclaim £70,000 (based on your figures)
payable £108,723
Profit £300,000

Nett £191,277 - very nice thank you :)

You have no choice but to register if the figures hit the correct levels
worth talking to your accountant about the different options - but yes, VAT (assuming that you are not going to pass it on to your clients) will reduce your profit...

think of it a different way - at the moment you are not charging VAT, so currently you are making extra profit...

it will simply be a case of expanding sufficiently that your overall profit outgrows the previous...

don't forget though that you can also reclaim vat on other things as well as the goods themselves - e.g. the computer you use to put it on ebay...

Alasdair

Thanks for the reply, I see what you mean. What I was worried about was going from small to medium and doubling the turnover and only making an extra £1000 profit, but after looking at those replies it doesn't look like thats the case.

[wizzard]

Fenton,

Get one asap, they'll help you with all of your VAT issues and recommend whether the flat rate scheme is suitable for your business.

[FentonSeller]

Fenton,

Get one asap, they'll help you with all of your VAT issues and recommend whether the flat rate scheme is suitable for your business.

Thanks for the advice, will do, just spotted the how to find an accountant section so will have a look around or see if theres someone local.

[UKSBD]

I would say it depends really if you have scope to increase the price of the product.

If your confident you can double your turnover it might be worth it, if you think you might only ever be just around the threshold every year, it may be better to only trade only so many months a year. (I assume it is just a part time business if only earning £15,000 a year)

With regard your question about is 25% enough profit on a product.
A lot depends on how many returns you get and how much time is put in to the sale of the product.

If your selling a product for £10, spending more than 10 minutes per transaction, have a 5% return rate, your probably earning below minimum wage.

If it is a £10 product, 1 minute per transaction, 1% return rate, then 25% is fine.

Work out the time and cost per sale to see if 25% is enough.

[FentonSeller]

I would say it depends really if you have scope to increase the price of the product.

If your confident you can double your turnover it might be worth it, if you think you might only ever be just around the threshold every year, it may be better to only trade only so many months a year. (I assume it is just a part time business if only earning £15,000 a year)

With regard your question about is 25% enough profit on a product.
A lot depends on how many returns you get and how much time is put in to the sale of the product.

If your selling a product for £10, spending more than 10 minutes per transaction, have a 5% return rate, your probably earning below minimum wage.

If it is a £10 product, 1 minute per transaction, 1% return rate, then 25% is fine.

Work out the time and cost per sale to see if 25% is enough.

Thanks for the reply.

Yes it is part time, the 25% is after all returns and costs etc. So the profit margin on each product is probably around 30-35%. If i'm lucky and the exchange rate goes up this will increase also.

I spend very little time really on it as I work as well so the salary/hr put in at the moment is very good.

If I expand however there will be costs of more storage space which will eat my monthly profit away and also the cost of the VAT so I'm trying to get an as accurate as possible forecast.

I'm reasonably confident I can double the turnover by simply increasing stock.

[elainec100@cheapaccounting]

What a great thread to demonstrate exactly why a business plan is needed BEFORE starting out. :)

Setting the numbers out with assumptions etc will see if all of this will be worth the effort.

If the numbers don't turn out right then you don't have a viable business :p:p

Include some 'what if scenarios' in the number e.g. change in exchange rate, vat rate etc